Higher spending, October 2021

Source: Pixabay

This is an update on my portfolio for the month of October. This was a quiet and uneventful month, but our annual spending is up 15% on a year ago.

October

The FTSE All Share Total Return index, my chosen benchmark, was up by +1.82% in the month, and is up by +15.63% for the year to date. My investment return for the month was a gain of +0.48%, and a gain of +9.74% for the year to date. My individual holdings recorded share price movements for the year so far ranging from a loss of -8.58% to a gain of +37.30% with an unweighted average result of a gain of +9.01%. The underperformance again arises mostly from lower returns on my non-UK holdings in the Asia Pacific and global equity income sectors. Returns from my UK holdings have, however, been mixed with only some of them ahead of the index. My UK holdings had share price movements ranging from +0.57% to +22.60%.

Capital

Starting from an index value of 100.00 at 31 December 2013, my capital is now 135.67, as shown in the graph above. This is below August’s peak of 138.67. It is up by +6.80% since the end of the 2020 year. Investment returns, growth and income, were +9.61%, and draw down expenditure deducted -2.81% for the ten months of 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 6.69% at this month end, as shown in the graph above. This is below August’s peak of 6.71%. The small increase in the month arose from one holding increasing its dividend and the dividend being re-invested on another holding. Portfolio income has increased by 3.37% in the year to date.

Investment changes

The reduction in portfolio income since August is a result of investment changes I made in September. I sold some “income” and “high income” holdings in order to raise cash and to add to my “growth” holdings. I didn’t trade in October. I may raise more cash, or switch towards growth, or do both, later this month or in early December.

Portfolio

The table below shows the composition of my portfolio at the end of the month. This has been analysed by the sector of each holding.

 Yield %Capital %Income %
UK4.1040.5433.73
Asia Pacific5.0522.8023.37
Global4.5218.6517.09
Bonds8.088.2313.50
Property7.288.2812.23
Cash0.251.500.07
4.93100.00100.00

I have also analysed by the income or growth category of each holding.

 Yield %Sectors
High Incomeabove 5%UK, Property, Bonds, Asia Pacific
Income4% to 5%UK, Global, Asia Pacific
Income & Growth3% to 4%Asia Pacific, Global
Growthbelow 3%UK, Asia Pacific
 Yield %Capital %Income %
High Income7.5725.9339.80
Income4.7447.4745.63
Income & Growth3.8713.4210.54
Growth1.6711.693.96
Cash0.251.500.07
4.93100.00100.00

Increasing share prices in the UK have reducing dividend yield percentages such that some of my UK holdings have moved from the high income to the income category this month.

Cash

My annual drawdown spending is now around 3.39% of my portfolio value, based on the last two years spending and the opening and closing values for that period. My cash holdings are sufficient to cover about five months of spending. In addition to this, 19% of my dividends are being paid out in cash each year and that is sufficient to cover about four months of spending. The remaining 81% of my dividends are being reinvested in my tax-sheltered accounts.

Expenditure

[Note: Annual Income 31-Oct-20 = 100]

In the above graph draw down spending was 62.20% of my portfolio income in the year to 31 October 2020. Then portfolio income for the last twelve months rose by 5.47% and expenditure rose by 14.85%. Draw down spending was therefore 67.73% of my portfolio income for the year to 31 October 2021 (i.e., 71.44 / 105.47 in the graph).


Expenditure was lower in October after a high spend in September, but expenditure has been 14.85% higher in the last twelve months compared to the previous twelve months. Looking into the detail of this higher spend gives this analysis.

Higher Spend% Share
Discretionary32.20
Tax26.40
Car21.36
Home12.61
Elec & Gas10.22
Other-2.79

The higher discretionary spend included both routine yearly spending but also some less routine spending such as a gas cooker, washer dryer, two laptop computers, and some furniture. The higher tax was for Capital Gains Tax on share disposals in 2019/2020 that was not repeated for 2020/2021. The higher car spend was incurred in September and will hopefully not be so high at the next MOT. Groceries don’t appear in the table because we spent slightly less than in the previous year! So far, our higher spending has been mostly based on choices we have made or one off or exceptional costs but that may soon change.

Talk of higher inflation has continued and the retail price index (RPI) has increased to an annual rate of 6.0% as at October 2021. The consumer price inflation index (CPI) is showing an annual rate of 4.2% but the Bank of England base rate of interest has been held at 0.1%. Our energy costs are already rising and I expect council tax and grocery costs will now also increase. We may soon need to be more choosey on what not to spend when making discretionary choices.

Conclusion

Presumably interest rates will rise at some point soon in order to attempt to reduce price inflation. The challenge of price inflation and higher interest rates does pose some concerns for the current level of share prices. I’m content to stay nearly fully invested in order to maintain my portfolio income at around the current level, but I may choose to raise a little extra cash rather than continuing my move into growth shares.

Reviewing my trading activity

Source: Pixabay

This is a review of my investment trading activity since the December 2019 UK election. I see myself as mostly a buy and hold investor but I have made some trades in the last twenty-three months. I traded in order to re-position between the UK and non-UK stock market, to reposition between income and growth holdings, to exit certain holdings, and to absorb inherited funds. It looks like my trades have had somewhat mixed results.

  1. In December 2019 I switched out of part of my existing holdings in one global equity trust and one Asia Pacific equity trust and into one new holding of a UK equity trust. All of these are equity income investment trusts managed by the same investment management company. I have been disappointed by my choice of new holding and I am now gradually switching out of that UK equity income investment trust and into a UK smaller company growth trust. I switched in March, June and September 2021 as part of my new strategy of building up my growth holdings. I have compared the share prices at 29 October 2021 of what I sold in December 2019 and what I hold now. I have ignored any dividends received in this analysis. Based on that I have made a loss of 8.70%. My hope that the UK market would recover relative to international markets has not so far been realised. Maybe my switch for growth will in time recover this one.
  2. In April 2020 I received some inherited investment trusts into my dealing account. I sold four UK trusts, one global trust and one Asia Pacific trust. I kept and added to another global trust and switched the remaining proceeds into a new Asia Pacific holding. Alongside this I sold my existing holdings of those same global and Asia Pacific investment trusts within my ISA and switched into UK trusts. Overall, this was just a portfolio tidy up, with sixteen different trades with a slight shift to international and Asia Pacific equities. It also enabled me to realise some taxable losses as part of managing my potential liabilities to capital gains tax in my dealing account. Comparing the share prices now, I have broken even on this one, with a tiny gain of 0.07%. This was really a tidy up exercise so I am satisfied with this outcome.
  3. In June and September 2020, I sold out of a long-standing UK holding in my dealing account. It had performed poorly, it had intimated it was to cut the dividend, losing its dividend hero status, and it was appointing new managers but continuing with a value investment approach. I spread the proceeds between four existing holdings, two in the UK one each in the global, and Asia Pacific sectors. Comparing the share prices now, I have made a loss of 18.29%. My allocation to a rival UK value trust shows a loss of only 4.65%, but my non-UK allocations show a loss of 14.21%, and my allocation to a UK trust with a quality growth approach is showing a loss of 37.30%. That new holding only grew by 5% whereas the new managers of my former holding achieved growth of 66%. UK trusts investing with a value approach have prospered over the last year. For the one year to 1 November 2021 the UK equity income investment trust sector averaged a 39% share price total return, with individual trusts returning between 7% and 106%. Many of those showing an above the average return are known for a value investment style.
  4. In February 2021 I switched half of my holding in a UK commercial property real estate investment trust (REIT) into a rival trust in that same sector. I had been disappointed by a dividend cut by my existing holding, but I was thoughtful that my new holding might now cut its dividend. My new holding has not cut its dividend so far and has since been uprated by the market. Comparing the share prices now, I have made a gain of 18.40%. I’m thinking that maybe I should have switched all of my holding rather than half of it.
  5. In March and April 2021, I sold out of another long-standing UK holding in my dealing account. I switched into two rival holdings managed by the same managers and/or the same management company that offered a higher dividend yield. One of these purchases covered my 2021/2022 ISA. The sale also enabled me to realise some taxable gains as part of managing my potential liabilities to capital gains tax in my dealing account. Comparing the share prices now, I have made a loss of 3.36%. Both new investments have disappointed so far, especially the ISA one, compared to the former holding.
  6. In April and June 2021, I sold parts of my holding in an Asia Pacific equity income trust and switched into an Asia Pacific small company trust as part of my new strategy of building up my growth holdings. Comparing the share prices now, I have made a gain of 10.70%. That is an encouraging start.
TradesInvestments sold*Investments bought*Gain/(Loss)Gain/(Loss) %
1 Switch to UK11.7310.71-1.02-8.70
2 Inherited funds40.1040.130.030.07
3 Sell holding13.0510.66-2.39-18.29
4 Property switch8.9810.631.6518.40
5 Sell holding22.3521.60-0.75-3.36
6 Switch to growth3.794.190.4110.70
Total100.0097.93-2.07-2.07

*Value now: Index based on the total current value of investments sold = 100.

Adding all that up I have a net loss of 2.07% on these trades. That represents a loss of about 0.86% of my average portfolio value over the period. It also amounts to about three months of my draw down expenditure. That is disappointing but not a disaster.

What can I learn from this analysis?

My worst outcome (3) was a result of selling an investment as it bottomed out at the end of a bad run and before new managers and a market recovery favourable to the value style could turn things around. With hindsight switching wholly to a rival trust in the same sector and with a similar investment style would have mitigated my loss. My next worst outcome (1) was a result of a sector recovery not happening. My best outcome (4) was a result of buying a trust just ahead of it being re-rated by the market.

This analysis shows me that my trades had varying outcomes. I shouldn’t expect to get it right every time or even to come out ahead on average. The future is unpredictable. This was interesting to review but the more important review is how overall my portfolio is performing over the longer term. I won’t let this review put me off changing my portfolio when I think it is needed but it does perhaps underline my preference to be mostly a buy and hold investor.

The cost of living, September 2021

Source: Pixabay

This is an update on my portfolio for the month of September. We had some exceptional costs in the month and I am now concerned about future price inflation.

September

The FTSE All Share Total Return index, my chosen benchmark, is down by -0.96% in the month, and is up by +13.56% for the year to date. My investment return for the month was a loss of -1.98%, and a gain of +9.21% for the year to date. My individual holdings recorded share price movements for the year so far ranging from a loss of -9.19% to a gain of +32.30% with an unweighted average result of a gain of +8.77%. The underperformance arises mostly from lower returns on my Asia Pacific and global holdings and some of my UK holdings.

Capital

Starting from an index value of 100.00 at 31 December 2013, my capital is now 135.43, as shown in the graph above. This is a fall from last month’s peak to the lowest position since March 2021. It is still up by +6.61% since the end of the 2020 year. Investment returns, growth and income, were +9.10%, and draw down expenditure deducted -2.49% for the nine months of 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 6.67% at this month end, as shown in the graph above. Portfolio income has increased by 3.03% in the year to date. This is a fall from last month’s peak. This fall is a result of investment changes I made in September. I chose to reduce my income a little in order to make changes.

Investment changes

Early in September I reduced an “income & growth” holding in order to raise cash levels. This represents about three months expenditure. I also reduced a “high income” holding in order to add to a “growth” holding. I have now built up a position of 4.14% of the portfolio in smaller company investment trusts that target capital growth as part of the 11.70% of the portfolio that I classify as growth. I expect to next review the portfolio at the end of November and may raise cash or switch towards growth or do both again in early December. In the meantime, about 80% of dividends received are being immediately re-invested in more of the same shares in order to grow my income.

Portfolio

The table below shows the composition of my portfolio at the end of the month. This has been analysed by the sector of each holding.

 Yield %Capital %Income %
UK4.1240.4833.85
Asia Pacific5.0222.9823.45
Global4.5118.4516.91
Bonds7.988.3513.54
Property7.418.0812.17
Cash0.261.650.09
4.92100.00100.00

I have also analysed by the income or growth category of each holding.

 Yield %Sectors
High Incomeabove 5%UK, Property, Bonds, Asia Pacific
Income4% to 5%UK, Global, Asia Pacific
Income & Growth3% to 4%Asia Pacific, Global
Growthbelow 3%UK, Asia Pacific

 Yield %Capital %Income %
High Income6.8835.7449.95
Income4.6937.4335.66
Income & Growth3.7813.4610.33
Growth1.6711.703.97
Cash0.261.650.09
4.92100.00100.00

Cash

My annual drawdown spending is now around 3.33% of my portfolio value, based on the last two years spending and the opening and closing values for that period. My cash holdings are sufficient to cover about six months of spending. In addition to this, about 20% of my dividends are being paid out in cash each year and that is sufficient to cover about four months of spending. The dividends being paid out are from, non-tax sheltered, dealing accounts.

Expenditure

Expenditure was heavier in September because our seventeen-year-old car, with over 103,000 miles on the clock, needed some expensive repairs to get through the MOT test. Expenditure has been higher in the last twelve months. This is partly because we had two holiday breaks this summer, and we replaced a gas cooker and a washer dryer. Fortunately, portfolio income for the last twelve months rose by 9.64% which was nearly as much as the expenditure increase of 9.98%. The increase in income is driven by continued dividend reinvestment and also from inheriting extra capital in April last year.

Draw down expenditure was 64.90% of my portfolio income for the last twelve months. This compares to draw down spending being 64.7% of my portfolio income in the previous twelve months.

This higher spending recently arises mostly from choices we made or from exceptional items rather than from high general price inflation. There is continued talk of higher inflation and the retail price index (RPI) has increased to an annual rate of 4.81% as at August 2021. I now expect this to show up in our future expenditure. Last month I switched energy provider in order to get a twelve-month fixed rate that was a 26% increase, rather than suffer a 46% increase. Since then both providers have gone bust so our account is being transferred to one of the bigger providers and I expect us to be paying a lot more. I am concerned now that groceries will also cost a lot more and that council tax may rise significantly next April.

Conclusion

Price inflation is now at the highest level I have experienced since beginning draw-down at the end of 2013. At the same time dividend growth is stalled. I can only get meaningful income growth by re-investing dividends in more shares. Fortunately, I am only spending 65.95% of my current portfolio so I have scope to re-invest. Depending on how things develop I may, however, have to stall on my gradual shift towards growth holdings.

On the road to financial independence – the first 1%

Source: Pixabay

When I started looking after my own money and began to invest things moved very slowly. There were no FIRE blogs, or even FIRE books that I was aware of. I didn’t know that FIRE meant financial independence retire early. My inclination was to save and invest as I began to earn money, but I had no long-term plan or target. With no internet back in the 1980’s my research was limited to the money sections of the newspapers. Looking back on things now I can see that it took me the first six years to accumulate the first 1% of the portfolio I had after the full thirty years of my working life.

My progress to date since I began investing in equities is illustrated in the graph on the top right of the sidebar, i.e., 1985 to 2020. Beginning a couple of years earlier the table and graph below shows some key points in the progress of my portfolio as I reached 1%, 5%, 10%, 25%, 50% and 100% of the endpoint in 2013.

YearsPortfolio %
61.08
106.66
1411.49
2125.73
2756.16
30100.00

(Portfolio % is the portfolio value at year 6, etc, as a percentage of the portfolio value at 31 December 2013.)

In that same six years I earned nearly 6% of my total career work earnings after-tax and spent nearly 9% of my work years spend. I saved less than 2% of what I would save and had benefited from less than 1% of my eventual investment growth.

YearPortfolio %Earnings %Spending %Savings %Growth %
00.260.000.000.640.00
10.130.321.290.310.00
20.131.062.360.330.00
30.271.893.430.650.02
40.502.914.921.130.07
50.654.226.651.300.21
61.085.888.671.720.63
30100.00100.00100.00100.00100.00

(Earnings %, Spending %, Savings % and Growth % are the cumulative values at year 1, etc, as a percentage of the cumulative values as at 31 December 2013.)

The thirty years included six years when the portfolio value went down, and twenty-four when it went up. Those first six years included five of the seven years showing the lowest increases in value. Incremental gains in those individual years were all less than 0.43% of that endpoint in 2013. Not knowing of the advances to be made later I was not disheartened at my then progress. I had the most I had ever had, at that point in time.

Spending

I maintained a modest and cautious lifestyle for the most part in those years. In many ways it was quite a boring time for me. In earlier years as a student, I had learned to live within the limits of my student grant and had graduated with no debts. In these early years of working, I continued to live within my means and never incurred consumer debt. Credit cards could be used but were paid off in full each month. I maintained cash book records of my financial position so I knew where I stood. Spending less than I earned was my key target here. These were useful habits to see me through the full thirty years and beyond. I was less cautious when it came to buying my own home. In the first year I plunged into the property market and bought a new build studio flat. This is reflected in the portfolio falling in year one as cash was spent and being static in year two as I was unable to save much. I was fortunate to have had help from my parents who provided some of my deposit money. I could and would have gone ahead without that but would have had to borrow more.

Saving

This graph shows my starting point and my savings in each of the next six years. The first year sees me spending about half of my savings as I buy my flat. I am able to save something in each of the following five years. I had only 1.72% of my eventual savings at this point.

Investing

In the third year I was beginning to save money more easily and began to invest in equities (company shares) using unit trusts that were advertised in the money sections of the newspapers. I invested just in time to make some gains ahead of the 1987 stock market crash when I lost one third of the value of my investments in two days. This was just a few days before I was due to move from my studio flat to a bigger two-bedroom flat. Fortunately, I had recently sold some investments to help cover some of the expenses involved in a property move. I didn’t need to raise any more cash so I could hold onto my investments until they recovered. I ended 1987 having made a small gain on my shares. It was useful to learn about investing from my own experiences and without too much skin in the game. As yet I had insufficient money invested to either enjoy big gains or incur big losses in £ amounts.

Earning

During these years I was trying to establish my career and make some progress in my work and my earnings. It seemed like there was slow progress at first. The first year has only a half year of working. In my first three years I earned less than 1% of my career earnings in each year and less than 2% in total. Then my earnings rose from this low base by over 20% in each of the next three years as my qualifications, experience and responsibilities increased. After six years I had more than doubled my earnings and was hopeful of continued progression. Earning close to average earnings in my first job but being able to double that in my twenties gave me a good opportunity to save and invest more. I had only 5.88% of my total career work earnings after-tax at this point.

Conclusion

I think now that those first six years taken to get to the first 1% laid the foundations for what was to follow. I had enjoyed rising earnings and had maintained cautious spending habits. I had no consumer debt, a reasonable level of mortgage debt, and was building up equity in my flat. Property price gains over five years at that time would have given me a 50% stake in my flat (although that was about to change for the worse). I was building up my investments in unit trusts and also held some of the privatisation share issues. I felt that as my income rose, I would spend more, but I would also be able to save and invest more. I was shortly to begin to think of having enough investments and savings to be able to live for a year without earning or to pay off a part of the mortgage. I wasn’t anywhere near thinking about financial independence or retiring early. I was still in my twenties and those ideas were unknown to me back then.

I like to think that my story is relevant to others. If you have only a small amount in your portfolio, that could still be a good starting point, if it can be a foundation that you can build on, especially if you have time and future prospects on your side. If your earnings rise more than your spending does and you invest your savings in equities, accepting the risks, then your portfolio can begin to enjoy compound growth. You may also have built up a foundation of habits connected to earning, spending, saving and investing that will equip you well for the journey ahead.