Getting Minted

Tomorrow there are changes being made to the lockdown as the UK tries to return to normal life in the wake of the coronavirus having peaked. Personally, I’m generally in favour of steps being taken by government to relax the lockdown but I also favour being cautious in the steps we as a family take. Some schools and school years are returning to their school buildings but our current expectation is that our children will remain in our home school until September, so that’s a step we don’t get to consider yet. In the meantime, our focus will continue to be on supporting home school and surviving as a family in this ongoing health crisis situation. This leaves less time to consider how best to maintain financial independence in the face of an emerging financial crisis. I like to think we have things in reasonable order financially. We have no debts, we have sufficient cash in the bank to cover our expenditure for the next few months, and we have an equity portfolio paying out regular dividends.

A quick look at our spending in the first two months of lockdown compared to the same month’s last year suggests a 10% reduction. We have spent less on things we can’t have or don’t need right now such as holidays, dining, drinks, entertainment, petrol, travel, more clothes, and more furniture. We haven’t spent any actual cash coins and notes. We have spent a little bit more on groceries and books. Fortunately, we only had one holiday booked and paid for and that has been postponed by twelve months. We can’t contemplate booking other holidays or spending on the house at this time.

During the past five months, as the portfolio fell by 41.76%, I managed to stay calm and not sell any of my equity shares. I was trying to keep my head as others lost theirs, but also, I hadn’t been clever enough to sell anything before the market fell significantly. Eventually in late April I did sell shares to the value of about 1% of my portfolio. In not selling at the lowest point I got 32.87% more cash for my shares, albeit I got 23.55% less than I would have at the end of last year.

My share sale should cover about three month’s spending. This sale was made to increase my available cash and followed the partial recovery in stock markets. At the moment I have cash to cover eleven month’s spending. That gives me some comfort. I have more time in which to choose when to raise more cash. I am currently taking the dividend payments on my non-ISA investments and these should now cover about five month’s spending each year. I would previously sell about 1% of the portfolio every three months but I can probably delay that for up to sixteen months if I choose to.

Markets have been relatively stable since mid-April. My portfolio has reduced by 23.52% in the year to date. I would need an increase of 30.76% to restore the year end position. This reduction includes only 1.24% of draw down expenditure over five months, which implies an annual withdrawal rate of around 3%.

After allowing for the receipt of some inherited funds I am actually only 11.07% down since the start of the year.

There has been quite a variation of share price movements in the year to date from my investment trust funds from a best of -7.78% to a worst of -49.32% and a simple average of -25.07%. That worst performing trust, which is in the UK equity income sector, may be sold and a replacement bought. I could choose another UK trust or switch to the international or Asia Pacific sectors. I could choose to seek a similar dividend yield which restricts my options, or I could accept a lower yield. I’m considering my options for now.

My commercial property trust has fallen by 31.80%. That may also be sold because analysts are suggesting that it will reduce it’s dividend by about 30%. That would reduce total portfolio income by about 4%. I could switch some or all of my holding into my high yield bond fund and accept about a 13% reduction rather than that 30%. Alternatively, I could switch to equities and accept a 40% reduction rather than the 30%. I’m considering my options on that too. For now, none of my holdings have declared a reduced dividend. I’m maybe too keen on dividends but may have to opt for a lower portfolio income before one is imposed on me by dividend cuts. It’s difficult to consider switching to avoid one dividend cut and maybe receive a different dividend cut from what you buy.

After switching to a more international portfolio (“going global”) last year I currently have around 40% in UK equities and about 40% in global and Asia Pacific equities, with property, bonds and cash making up less than 20%. The international holdings, the bonds and the higher quality UK holdings have performed best this year. The property, and the more value orientated UK holdings have performed less well.

I can now see me moving away from a high yield income growth investment approach towards more of a total return approach although this will likely take some months and years to evolve. As mentioned, I may switch to lower yielding trusts to avoid further poor performance and possible dividend cuts. My current portfolio income exceeds my requirements. I am reluctant to see that income fall but I don’t need it to rise necessarily. As dividends are increased (hopefully) I can switch more into lower yielders. Where my re-invested income exceeds my share sale proceeds, I can use that to switch to lower yielders. Holding such lower yielding investments will hopefully enable me to benefit from better share price growth.

It is still my assumption that I will not face significant dividend cuts because of the revenue reserves held by my dividend hero investment trusts.

It is now one month after the recent stock market low point on 19 March. I am still more concerned about health matters than financial matters. Tomorrow I will again be concerned and distracted by our children’s home school. I’m still taking stock of the situation we are in and my financial thinking is concerned with surviving this, hopefully, short term crisis. This post records my current thinking.

Based on values at the close on Thursday 19 March my portfolio had fallen by 41.76% this year of which only 0.86% was draw down spending. One month on and based on values at the close on Friday 17 April my portfolio had fallen by 24.51% this year of which only 1.00% was draw down spending.

I have also now received some inherited funds following a recent bereavement. Allowing for the uplift from that I am down by 12.31% since the turn of the year.

When I was 41.76% down, I would have needed an increase of 71.70% to recover. This reflects that if there is a 50% fall then you need a 100% increase to recover. Since that low point the increase has been 29.62%. A further increase from current values of 32.46% would complete the recovery. I worry, however, that we may see more of a decrease before we see such a further increase. The flow of news and the market reactions to come are unpredictable.

At a trust level some of the volatility has been extreme with falls of up to 63% from a twelve-month high being followed by rises of up to 105% as at Friday, when looking at daily prices over the last four months. If you are reasonably confident of your investment approach it is probably best not to look too closely at such daily movements. I look most days, which is more often than I should, but I don’t feel compelled to re-act. Rightly or wrongly, I have remained mostly passive in the markets since 10 December 2019 when I last sold shares and withdrew cash just before the election. I’m still considering reducing my high yield bond and commercial property exposure by switching to equities in my ISA. I am watching to see what will happen on dividend payments.

My current liquid cash position, my cash bucket, is enough cash to cover eight months of spending at current levels or twelve months if I reduce spending. The spending reductions would include some of the things we can’t do at present such as holidays and meals out. They also include cutbacks on discretionary spending on the house and on clothes which can be postponed. Investing in the children’s Junior ISA’s, which I record as spending, could also be reduced or stopped temporarily. I think some of these reductions will happen because of the lockdown and others I will need to decide to implement. I don’t propose to reduce other discretionary spending or charitable donations.

My non-ISA held shares are now paying out all their dividends to me. If these dividends are maintained at current levels then one year’s dividends from them will cover four months spending at current levels or seven months if I reduce spending. I reckon I can therefore avoid selling any shares or taking any dividends from my ISA for over twelve months, and maybe for nineteen months.

I may, however, choose to raise more cash now at current prices so I can increase my cash bucket to cover another three or four months of spending. This would mean selling about 1% of my portfolio. Being 97.36% invested in equities, high yield bonds, and commercial property is maybe a bit aggressive in the currently volatile markets. I should maybe raise some cash now that share prices have recovered some ground.

Dividend payments are endangered in the current situation which threatens my commitment to a natural yield approach to a safe withdrawal rate. It may be that the dividend hero investment trusts, both actual and aspiring, that I am invested in will hold firm and use their revenue reserves to make up for dividends being cancelled or reduced by the companies they hold. This seems likely if the dividend downturn lasts for only one year. Studies have shown, however, that a second year of falling company dividends would be challenging even for some of the dividend heroes. Since 2013 my spending has been below the dividends I have received. It may be that in 2020 or 2021 my dividends will fall below my spending. In the short term I can cover any shortfall by spending cash from my cash bucket.

I still believe in stocks for the long run and on that basis, I will stay near enough fully invested and mostly in equity income investment trusts invested in the UK, Asia Pacific, and global sectors. I will continue to roll with the punches as thrown by the markets. As a short-term measure, I am likely to raise cash to top up my cash bucket by selling some investments from my non-ISA holdings. What happens on dividend payments may lead me to reduce or sell off the commercial property and high yield bond trusts in my ISA. This is my short-term thinking.

I am now asking myself whether I have been too complacent, or even smug, about my financial position. Was my portfolio as well positioned as I thought it was? I think it was the boxer Mike Tyson who said that everyone has a plan until they are punched in the mouth. I have been punched by a 40% fall in net worth this year, and most of that in the last month.

I’m mostly a buy and hold investor with portfolio turnover of less than 10% per year. I have not tried to trade out and back in through volatile markets. I have invested predominantly in equity income for nearly fifteen years, and watched my portfolio income rise steadily. I have diversified from the UK to add global and Asia Pacific investment trusts, and then to add corporate bond and commercial property investment trusts.

The two graphs tell a different story – or I hope they do! Since taking my leave of the workplace I have managed to achieve a large increase in the income produced by a mostly equities portfolio. At the same time that portfolio has shown a steady, but less rapid, rise in value punctuated by times of volatility where values fall and rise again. Now, can I believe that the income will hold up when portfolio values have taken a steep dive akin to that of a jump off a diving board?

Things have moved so fast that my ruminations and calculations on whether to re-position were overtaken by such extreme daily price movements that I have decided to sit tight for now at least. I believe in staying invested to get the income and to capture the price growth, when it happens. I had considered reducing my exposure to my two highest yielding investment trusts – one in high yield bonds, and one in commercial property – by diversifying to other trusts in those sectors, but had done nothing. Looking back at the past month that would have made at best a marginal difference.

Based on values at the close on Thursday 19 March my portfolio had fallen by 41.76% this year of which only 0.86% was draw down spending. The value of that fall exceeds all the money I saved into the portfolio over a near thirty-year career, but I am left with most of the growth on those savings, at the moment. An alternative view is that I still have all my savings but have lost 61% of my gains. That’s about all the gains (net of draw-down) since 2011. It’s too much to comprehend. I’m determined not to sell – and thereby not to realise this paper loss!

This has compelled me to take stock of my liquid cash position and my expected expenditure. I raised cash levels ahead of the election which has helped to ensure that I have about seven months spending in available cash. If needed I can reduce spending to make this cash last for ten months. I had been re-investing all my dividends and selling down shares not in my ISA every three months to fund my expenditure. I have now set these non-ISA held shares to pay out their dividends, which will give me enough cash over the next year to cover three months spending. I reckon I can therefore avoid selling any shares or taking any dividends from my ISA for over twelve months.

One concern is what will happen to dividends in the next few months. I think the 61% of my portfolio I have in equity income investment trusts that are actual or aspiring dividend heroes will maintain and very slightly increase their dividends overall. They have dividend reserves they can use in order to sustain their dividends when the dividends they receive are reduced. If the current crisis is prolonged and dividend reserves are depleted then that may change after one or two years. I am more concerned about the 15% of my portfolio that I have in corporate bond and commercial property investment trusts. These are more likely to reduce their dividends substantially. I am considering whether to recognise that and take a dividend hit on them now by switching from them to lower yielding equity trusts.

In a way I’m not too worried by this fall in net worth because I have experienced similar falls in 1987, 2001-2002, and 2008, and seen things recover. This current crisis is, however, different to those and is unprecedented in recent history. The other aspects of this crisis do, however, give me more things to worry about than my net worth, and tend to put that aspect in perspective. I am concerned for the health and the life of myself and my family, and our friends and acquaintances. I am concerned about doing the right things in terms of social distancing, shopping but not hoarding, and helping people where we can. I am concerned about supporting our children’s education and well-being now that their school has mostly closed and lessons have moved online. I am concerned about the consequences for the UK economy and government. I think these concerns are going to weigh more heavily on me than my financial position in the next few weeks and months – so long as I have sufficient cash to cover our now reduced spending.