On the rebound, July – August 2022

Source: Pixabay

Markets and my holdings have rebounded in July and in August so far. That is despite increasing inflation, predictions of a prolonged recession, a cost-of-living crisis, and a war in Europe.

My portfolio total return was a loss of -4.99% for the six months to June, but as I write, in mid-August, my total return is a loss of only -0.93% for the year to date. That’s just one down day in the markets.

July

The FTSE All Share Total Return index, my chosen benchmark, was up by +4.36% in the month, and down by only -0.41% for the year so far. My investment return for the month was a gain of +2.79%, and a loss of -2.36% for the year so far. That’s some underperformance against my benchmark.

My individual holdings recorded an unweighted average share price movement of a loss of -7.39% for the year so far. My worst performer continues to be a UK small company investment trust that is now showing a loss of -35.32%. My second worst performer is a commercial property REIT that is down -21.94%. My third worst performer is an Asia Pacific small company investment trust that is down by -14.55%. These are all positions that I have added to in recent months, so I’m hoping for better times ahead. The best performer continues to be a global equity income trust that is up by +7.27%.

Capital

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Starting from an index value of 100.00 at 31 December 2013, my capital is now 134.67, as shown in the graph above. This is -4.50% down from March’s peak, the high-water point for my portfolio. My capital value remains below its ten-month average. There has been a decrease of -3.94% in the year to date. Investment return of a capital loss of -4.90% and dividend income of +2.56%, totalled an investment return of a loss of -2.34%. Draw down expenditure deducted -1.60% during the year so far.

Income

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Annual dividend income as a percentage of the opening portfolio value on 31 December 2013 has increased from 3.37% to reach 6.83% at this month end, as shown in the graph above. This is another new peak. My current portfolio dividend income yield is 5.07%, i.e., 6.83 divided by 134.67.

Investment changes

In July I made a small switch from my best performing global equity income trust to my worst performing UK smaller companies trust. This was only about 0.6% of my portfolio and only slightly shifts their weightings in my portfolio. This is part of my ongoing but slow-moving shift towards more growth holdings and less income holdings in the portfolio. There were also some dividends re-invested in my tax-sheltered accounts during the month.

Portfolio

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

 Yield %Capital %Income %
UK4.0639.4631.61
Asia Pacific5.2624.8025.75
Global4.3418.1315.50
Property7.708.9913.66
Bonds8.627.8413.32
Cash1.050.770.16
5.07100.00100.00

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

 Yield %Sectors
High Incomeabove 6%Property, Bonds, Asia Pacific
Income4.5% to 6%UK
Income & Growth3% to 4.5%Global, Asia Pacific
Growthbelow 3%UK, Asia Pacific

My growth holdings are now 14.95% of the portfolio compared to 7.81% in February 2021 just before I began my shift to growth. This is intended to improve the long term growth returns of the portfolio by including more growth oriented holdings including smaller companies.

 Yield %Capital %Income %
High Income8.2823.9139.05
Income4.9228.2927.43
Income & Growth4.3232.0827.31
Growth2.0514.956.05
Cash1.050.770.16
5.07100.00100.00

Cash

My annual drawdown spending is now around 3.51% of my portfolio value, based on the last two years spending and the opening and closing values for that period. My cash holdings are now sufficient to cover about three months of spending. In addition, dividends being paid out in cash each year from my dealing account are sufficient to cover about three months of spending. I will need to sell some shares to raise cash again in the next few months.

Expenditure

Draw down spending was 63.49% of my portfolio income in the last twelve months which is almost identical with the figure of 63.55% for the previous twelve months. Portfolio income (+0.02%) and expenditure (-0.08%) was essentially unchanged.

RPI and CPI inflation reached annual rates of 11.84% and 9.43% at the end of June. This impacts us in higher energy bills and grocery bills that are beginning to rise.

Conclusion

I am pleased to see capital values rising again. That is helpful in that I will need to raise cash to spend by selling some shares soon. My portfolio income continues to rise, albeit slowly, and my shift towards growth is progressing, also slowly.

A bad month, June 2022

Source: Pixabay

The Telegraph reported that “the global market rout has wiped $13 trillion off world stocks in the worst start to any year on record as business and consumer confidence collapses amid surging inflation. The MSCI World Equity Index has shed more than 20pc so far this year in the steepest first-half decline since its creation, led by a plunge in loss-making tech companies as investors panic over the end of ultra-low interest rates. In the UK, the FTSE 100 fell 1.96pc on Thursday to close out its worst month since the early days of the Covid pandemic.”

The Spectator World, which usually concentrates on US political news, reported that “this is the worst first six months for the S&P 500 in fifty years. The index is down 20.6 percent since January 1. The only first-six-months that were worse for [US] investors: 1970, 1962 and 1932.”

I can report that my portfolio total return is a loss of -4.99% for the last six months. As at the end of May my portfolio was showing a positive investment return of +1.43% for the year to date, but June was my third worst month of the past eight and a half years of drawdown. The worst two months were February and March 2020 at the onset of the pandemic.

June

The FTSE All Share Total Return index, my chosen benchmark, was down by -5.98% in the month, and down by -4.57% for the year so far. My investment return for the month was a loss of -6.37%, and a loss of -4.99% for the year so far. My individual holdings recorded widely different share price movements for the year so far. My worst performer is a UK small company investment trust that is showing a loss of -40.63%. My second worst performer is a commercial property REIT that is down -23.00%. I added to my position in that one during the month. Only three holdings are in positive territory. The best performer is up by +6.75% and is invested in global equity income. My other commercial property REIT is up by +1.60%. My best performing UK equity income holding is up by +1.65%. The unweighted average result of all of my holdings is a share price loss of -10.33%.

Capital

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Starting from an index value of 100.00 at 31 December 2013, my capital is now 131.31, as shown in the graph above. This is 6.88% down from March’s peak, the high-water point for my portfolio. My capital value has fallen below its ten-month average for the first time since 2020. This is a worrying trend if it continues. There has been a decrease of -6.33% in the year to date. Investment return of a capital loss of -7.44% and dividend income of +2.48%, totalled an investment return of a loss of -4.95%. Draw down expenditure deducted -1.38% during the year so far.

Income

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Annual dividend income as a percentage of the opening portfolio value on 31 December 2013 has increased from 3.37% to reach 6.81% at this month end, as shown in the graph above. This is another new peak. My current portfolio dividend income yield is 5.19%, i.e., 6.81 divided by 131.31.

Investment changes

I took advantage of changes in the relative pricing of my holdings in a bond trust and a commercial property REIT to make a small switch from the former to the latter. Both are now yielding close to 9%, whereas the property REIT used to yield about 1% less than the bond trust. The effect of this is to reduce my exposure to a high yielding (“junk”) bond trust and increase my exposure to a property REIT that is out of favour, whilst maintaining my income yield. I’m reluctant to add to my high-income holdings but I will switch between them to try and get a better return or to try and reduce the risks to the portfolio.

There were also some dividends re-invested in my tax-sheltered accounts during the month.

Portfolio

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

 Yield %Capital %Income %
UK4.2937.9731.41
Asia Pacific5.2825.2925.72
Global4.3518.8715.82
Property7.878.9313.56
Bonds8.737.9113.32
Cash0.901.020.18
5.19100.00100.00

I also analyse the portfolio by the income or growth category of each holding. I have amended the yield criteria for these groupings this month following the market falls.

 Yield %Sectors
High Incomeabove 6%Property, Bonds, Asia Pacific
Income4.5% to 6%UK, Asia Pacific
Income & Growth3% to 4.5%Global, Asia Pacific
Growthbelow 3%UK, Asia Pacific

My global holdings are now all in the income and growth category.

 Yield %Capital %Income %
High Income8.3424.2438.98
Income4.9735.1733.67
Income & Growth4.2825.7921.30
Growth2.2113.785.88
Cash0.901.020.18
5.19100.00100.00

Cash

My annual drawdown spending is now around 3.47% of my portfolio value, based on the last two years spending and the opening and closing values for that period. My cash holdings are now sufficient to cover about four months of spending. In addition, dividends being paid out in cash each year from my dealing account are sufficient to cover about three months of spending. I will need to sell some shares to raise cash again in the next few months, so I’m hoping for an uplift in prices. The share price of the holding I would probably choose to sell is down by about 14% this year.

Expenditure

Draw down spending was 62.55% of my portfolio income in the last twelve months which is in line with the figure of 61.16% for the previous twelve months. Portfolio income rose by 1.59% and expenditure rose by 3.90%.
RPI and CPI inflation reached annual rates of 11.66% and 9.03% at the end of May. Analysis in the Sunday Times this week suggested that most households (excepting the very highest income ones) needed between £98 and £164 extra cash each month to cover cost of living increases. For us the higher energy bills will account for all or most of those amounts. We don’t routinely use much petrol so are not much impacted by petrol price rises. I think, however, that this inflation may be beginning to impact on our grocery spend based on the last four weeks, but the last six months overall is still in line with last year’s spend.

Conclusion

My portfolio income is stable and rising at present, so I’m not too perturbed by the fall in portfolio capital values. I need to consider when next to raise cash to spend, and I will also look for any opportunity to make small switches to the portfolio. These would be small moves involving less than 1% of the portfolio. Otherwise, I expect to continue to sit tight through this market storm.

Don’t panic, May-June 2022

Source: Pixabay

My portfolio capital and my portfolio income continued to be stable and relatively unchanged in the year 2022 to date and in the month of May. Things have, however, changed a bit since then as regards capital values.

May

The FTSE All Share Total Return index, my chosen benchmark, was up by +2.33% in the month, and up by +1.50% for the year so far. My investment return for the month was a gain of +0.22%, and a gain of +1.43% for the year so far. My individual holdings recorded share price movements for the year so far ranging from a loss of -29.75% by a UK small company investment trust, to a gain of +14.01% by a commercial property REIT, with an unweighted average result of a loss of -3.88%.

Capital

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Starting from an index value of 100.00 at 31 December 2013, my capital is now 140.58, as shown in the graph above. This is another slight fall from March’s new peak. There has been an increase of +0.28% in the year to date. Investment return of a capital loss of -1.04% and dividend income of +2.47%, totalled an investment return of +1.43%. Draw down expenditure deducted -1.15% during the year so far.

Income

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Annual dividend income as a percentage of the opening portfolio value on 31 December 2013 has increased from 3.37% to reach 6.79% at this month end, as shown in the graph above. This is a new peak. My current portfolio dividend income yield is 4.83%, i.e., 6.79 divided by 140.58.

Investment changes

Following a burst of activity in the first week of April as I raised cash for regular spending and for reinvesting in my ISA, and realised some capital gains, things have gone quiet again. The only activity during the month of May was that some dividends were received and re-invested in my tax-sheltered accounts and some dividends were received and paid out from my dealing account. These dividends amounted to about 1% of my capital and this was my second highest monthly pay-out of dividends. This reinvestment has pushed portfolio income to a new peak. This gives me a little scope to reposition the portfolio towards lower dividend holdings or else to raise a little more cash without reducing my portfolio income too much.

Portfolio

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

 Yield %Capital %Income %
UK3.9938.0531.43
Asia Pacific5.0224.7625.75
Global4.0518.9315.87
Property7.068.7612.80
Bonds8.348.1314.04
Cash0.381.360.11
4.83100.00100.00

The portfolio is now much more diversified than it used to be. The traditional UK equity income “dividend heroes,” actual and aspiring, make up only 28% of the portfolio now. Asia Pacific equity income is 21%, and global equity income is 19%. High yielding bonds and property accounts for 17%, and low yielding growth holdings, in UK and the Asia Pacific, amount to 14%. (Should I now add more to these growth holdings or should I build back up my UK equity income holdings?)

I also analyse the portfolio by the income or growth category of each holding as follows:

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

My recent switches mean that I no longer have any UK holdings in the high-income category.

 Yield %Capital %Income %
High Income7.7624.2238.93
Income4.5446.9144.11
Income & Growth3.8613.7110.96
Growth2.0613.815.89
Cash0.381.360.11
4.83100.00100.00

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. That’s an increase from last month but still consistent with recent months. My cash holdings are now sufficient to cover about five months of spending. In addition, dividends being paid out in cash each year from my dealing account are sufficient to cover about four months of spending. I will need to sell some shares to raise cash again but not for several months.

Expenditure

Draw down spending was 63.41% of my portfolio income in the last twelve months which is higher than the figure of 59.44% for the previous twelve months. Portfolio income rose by 0.21% and expenditure rose by 6.90%.

May was our highest spending month since December 2020. We had additional to normal spending on home improvements, a new laptop computer, a summer holiday booking, and some capital gains tax. We also had our biggest ever monthly spend on energy. It was about double what we paid just about one year ago.

RPI and CPI inflation reached annual rates of 11.13% and 8.99% at the end of April. My impression is that this has not yet impacted on our grocery spend. With about 60% of our spending being on discretionary or luxury items I still believe we can make some choices to avoid the full impact of such double-digit inflation on our total spend.

Two weeks of June

At the time of writing this, my portfolio has dropped by about 3.5% in June. That is a reduction of over -3% in the 2022 year to date. That drop in June will include a little June spending but is mostly the result of the market downturn in recent days. I estimate that the year-to-date total return on my growth holdings is a loss of around -20%. I expect that a loss of around -20% is the total result for other investors targeting only growth. (Should I switch to add to my growth holdings at these reduced prices or should I hold fire for now because they will continue to fall?) Most of my other portfolio segments are showing around a -1% loss, except global income which I estimate is in positive territory at +6%.

Conclusion

Based on recent months this mid-month turbulence may have subsided by the end of June, but alternatively it could worsen. I will likely sit tight with my current portfolio and consider my next moves at my leisure. My portfolio income is at a new peak and dividends continue to be maintained or increased slightly. I have experienced no dividend cuts since one commercial property holding cut its dividend in 2020. In addition, I am effectively able to reinvest over one-third of my portfolio income in more dividend paying shares. I can therefore afford to sit tight and see how this market storm plays out.

Budgeting for the cost-of-living crisis

Source: Pixabay

I’ve recorded my spending since I started at university as a student over forty years ago. I used notebooks and cashbooks back then, but I now have just over twenty-five years of computerised records. This has required a bit of work to maintain to say the least, but it is a useful source of data. In order to manage your spending, you need to understand where the money goes. With much talk of a cost-of-living crisis and annual inflation seemingly headed to 10% I’ve been looking at our family spending.

In preparing my tax return for the year ended 5 April 2022 I produced an income and expenditure report. There are 75 income transactions, and 1,113 expenditure transactions. I analysed the spending as follows:

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Essential spending

I then analysed essential spending as follows:

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Groceries, tax and utilities are the biggest three items and amount to three-quarters of essential spending.

We aim to do one weekly shop online to cover our grocery needs for a family of four. We use one of the top four supermarkets and pay for a delivery plan. We mostly avoid premium brands and buy supermarket own brands. We sense check all items costing over £2 when we receive the delivery. We try and avoid any top up shopping and mostly manage to do that. We have a reward card but we don’t chase coupons or offers. Aside from that I’m not sure what else we can do to reduce grocery costs. We don’t yet see any large rise in our grocery costs this year.

Tax is mostly Council tax and that has risen by 4.11% this year which is now below inflation. We did challenge the valuation band for our house many years ago, as suggested by the Money Saving Expert website, but were unsuccessful. Our house was sold around the time of the valuation in 1991 and that supported it staying in the higher band.

Utilities are mostly electricity and gas. After several years of switching energy providers, and maybe saving 25% on our bills, I now feel we are prisoners of the forces at work in the international energy market. The last two such providers went bust last year and we are now on the capped tariff of one of the larger providers and expecting to pay about double what we used to pay until the next price rise. It may rise next in October to be three times what we paid one year ago. It may even exceed 10% of our total spending. It shouldn’t exceed 10% of our income so we won’t be regarded as in energy poverty! Currently, our direct debit varies each month dependent on the meter readings we send. April energy cost twice that of last April. Other utilities are phones, internet, and water. We pay £30 per month for the internet and phone line, and £26 per month in total for four mobile phones. I don’t think we can save much here. Our water charges are based on metered usage and despite being a family of four are less than half what our water rates used to be.

Transport costs include for motor car services, motor fuel, and transport fares. This area is difficult to budget for. Last year we had our biggest ever car service bill. The car is over 17 years old with over 100,000 miles on the clock so perhaps we should expect more of the same, or else we will have to buy a new car. Increased petrol prices shouldn’t be too onerous for us as our annual mileage has been rather low in recent years. Transport fares are local journeys at little cost.

Household costs include general household expenses, insurances and home repairs. I use a price comparison site each year on the renewal of our buildings, contents and motor insurance. That has kept them reasonable in recent years. Otherwise, this area is difficult to budget for. For instance, we had four home repair jobs last year but next year we might have none.

I think our essential spending is under control, but there is little scope to avoid increases in grocery costs, and next to no scope to avoid increased energy costs. I’m not counting on any government energy cost help reaching us.

Discretionary spending

The biggest discretionary spend is contributing to Junior ISA accounts for our two children. That would be the biggest “saving” we could make if we felt had to reduce or stop those, but it would be costly for the children’s future.

Other items here include home improvements, new electrical goods and new furniture items. Having bought a new cooker, new washing machine, and new bedroom furniture for the children’s rooms last year, maybe we will spend less this year. Alternatively, there could be new one-off projects to do on the house or garden (or a new car).

Charity donations and investment research costs are also included here. These could be reduced but they are not significant.

Overall, this area of discretionary spending is the one where we could make big cut-backs if we need to and mostly without any impact on our current lifestyle.

Luxury spending

The biggest item here is luxury goods such as books, magazines, newspapers, and music CD’s. That could be cut back significantly as there are plenty of past purchases to read or listen to. Subscriptions we have to the Readly app and the Apple One account also provide plenty to read or listen to. I am reluctant to cut back because these are my interests and my indulgences.

The next biggest is dining. That is quite high and it is likely to remain at this level unless we do less. It includes spending at restaurants, at pubs, on takeaways, and at coffee shops. It also includes school dinners that should probably be included in essentials.

Third biggest is holidays. It is lower than before the lockdown so it is likely to rise in the next year as we are able and want to do more.

Fourth biggest is entertainment. This is also lower than before lockdown and likely to rise if we go out more to concerts, theatres and cinemas. Subscriptions such as Netflix are included here but are relatively minor costs compared to a concert ticket or even cinema tickets for the whole family.

Other luxury spending is rather low and could easily rise a bit but it is not significant to our total spending.

Overall luxury spending is a bit down because of the restrictions imposed in the past year and it is likely to rise this year. I am reluctant to try to reduce it because of its contribution to our quality of life. I could, however, change the spending mix a little say by spending less on books and more on holidays.

Investment Income

Our total spending has reduced as a percentage of our available investment income in recent years. That trend could go into reverse. Future changes in that income are impacted by the economic situation of our investments and whether and by how much dividends are increased or reduced. They are also affected by investment choices I make. I have recently held my income steady by switching a small part of my portfolio into growth holdings that pay less income whenever total income rose. I will likely pause this soon to allow the dividend income I receive to increase. Even if dividends aren’t increased, I can still grow income by reinvesting some income in more shares so long as income continues to exceed expenditure.

Conclusion

We will continue our current approach on grocery spending and it will be interesting to observe what inflation rate I can calculate. We will have to endure the energy price rises but will keep an eye on what Money Saving Expert Martin Lewis has to say about any steps we can take. I will look to reduce luxury goods spending including any subscriptions we can give up. We will aim to continue with our other luxury spending such as on holidays and eating out. We will consider carefully any discretionary spending we want to spend on the house. If necessary, we can reduce our Junior ISA contributions, but we may need to, or choose to, accept a higher level of total spending. With that possibility in mind, I will be considering how to again grow the investment income we receive. I feel that despite being in drawdown we will be in a better position than many other families.