Getting Minted

Hello again after a long break in my writing here. Today I’m going to consider the state of my finances during and at the end of the 2023 year. The United Kingdom and the wider world experienced changeable markets during the year. Inflation in retail prices continued during the year but we should have now passed peak inflation. World events in Ukraine and the middle East are also impacting on trade, economics and therefore markets. This year elections will also be a factor. Within that environment I will now examine how things worked out for me.

Capital and income

I finished my last real job in December 2013 so 2023 was my tenth year of drawing down my investments to fund my financial independence. Both the capital value of my investment portfolio and the dividend income paid to me by my portfolio have increased over the ten years.

Starting from an index value of 100.00 on 31 December 2013, my capital is now 131.99, as shown in the graph above. Capital peaked in March 2022 at 141.01.

Annual dividend income as a percentage of the opening portfolio value on 31 December 2013 has increased from 3.37 to reach 7.10 at this month end, as shown in the graph above. My current portfolio dividend income yield is 5.38%, i.e., 7.10 divided by 1.3199. Income peaked in August 2023 at 7.32 just before a property holding (later sold) cut its dividend.

Share prices

In a year when despite many downs the FTSE All Share Total Return Index rose by 7.92%, my portfolio return was only 1.83%. This is a third consecutive year of underperformance against the UK market. I’m disappointed but hoping for a turning point. My capital portfolio value was down -1.89% compared to the previous year end. Portfolio income of +5.35% exceeded drawdown spending of -3.68% but capital values (share prices) fell by -3.56%. A commercial property holding I sold in September had lost 33% in the year at the point when I sold it. Allowing for the size of that holding I estimate that this loss contributed -1.22% to the total loss of -3.56%. My remaining holdings at the year-end show an unweighted average share price loss of -1.47%. The worst result was -21.32% from an Asia Pacific holding. The best result was +12.11% from another property holding after a price recovery towards the end of the year. My other holdings were within a range of -8% to +3%. These holdings are all investment trusts and will have been impacted by the widening discount on their share prices compared to their asset values.

Cash

At the year-end I held less than 1% of the portfolio in cash. On 2 January I sold shares to the value of just over 1% of the portfolio to increase my cash to 2% which covers our spending for the next six months.

Dividends

In 2023 my portfolio dividend income was more than sufficient to cover our expenditure as a family of four. Spending was 69% of income in the year. Income was up by only 2% on the previous year whereas expenditure was up 15%. That meant that we spent 69% of income in 2023 compared to 62% in 2022. Income was increased by re-investing surplus income from dividends received in more shares and by some rather small dividend increases. Income was adversely affected by a dividend cut by a commercial property holding. That led me to bite the bullet and sell that holding and re-invest in alternatives that pay lower dividends that will hopefully not be reduced.

Spending

Expenditure in 2023 was significantly higher on all three of our biggest essential items compared to 2022. It was up by 16% on groceries, by 37% on council tax and by 99% on energy. These last two were partly higher because of timing factors that meant costs were lower in 2022. Moving from a standing order paid over ten months to a direct debit paid over twelve months meant more council tax was payable in 2023 even before a 15% increase was implemented by our local council. Overpayment of energy costs in 2021 when our suppliers went bust meant that 2022 was less costly than otherwise. 2023 was costly and the new normal sees our energy costs being more than double what they were only three years earlier. Our spending choices on certain items that I classify as luxury and discretionary costs increased by a massive 72%. We chose to spend more on home improvements (doors and windows), on electrical goods (TV and phones), and on furniture (sofas, table, desk, sideboard). We have lived in our house for over twenty-five years and with some of these items for nearly as long, so we were perhaps overdue to incur this spending. We also had our first overseas holiday for several years. Fortunately, the other items of our spending fell by 5%. This represents a combination of choosing to spend less or not needing to spend as much as last year. Our overall spending was therefore up by only 15% despite some expensive choices having been made.

Trading

I’m a buy and hold investor. I re-invest dividends in my tax protected accounts. Dividends in my trading account are paid out to me. I’m gradually selling the shares in the trading account to cover our spending and to fund contributions to my ISA each year. In 2023 I sold shares in January, April, August, and October to cover our spending. In April I sold shares in the trading account and bought the same shares back in the ISA. I was out of the market for two days, but the share price scarcely moved. In June I reduced my position in a UK income trust by 0.5% of the portfolio value and increased my position in a commercial property trust. In September I sold out of a commercial property trust. I used the proceeds to add to two other existing commercial property trust holdings. The trust sold had previously reduced its dividend in 2020 and that contributed to my decision to halve my position in February 2021. With hindsight I now think I should have sold it all then. After it reduced its dividend again in September 2023, I finally sold the remainder of my shares. In the time between the two sales the share price halved whilst the alternative I bought in 2021 went up 15%. I’m a buy and hold investor but sometimes you need to sell. Overall portfolio turnover was below 8% in the year.

Portfolio

The table below shows the composition of my portfolio at the end of the month. Over the year the share of income contributed by UK and Asia Pacific has increased and that of property has fallen. My highest yielding holding is now in the Asia pacific sector. This was my worst performer in the year, of those still held at year end. I may consider reducing my position on that one this year. My plan to switch towards more growth holdings has stalled this year, although I currently have 16% of the portfolio in such holdings, compared to 22% in high income holdings. I have fourteen holdings and I may consider increasing or reducing that number during the year. I could increase my position in UK small company trusts or add a new position in a global income trust that pays out income from capital growth. The first option would suit any recovery in the UK, whilst the second option would give exposure to some of the large US tech companies that have had a good run this year.

	Yield %	Capital %	Income %
UK	4.03	32.63	24.46
Asia Pacific	6.28	25.11	29.29
Global	4.42	19.33	15.89
Property	6.17	13.18	15.11
Bonds	8.87	8.93	14.72
Cash	3.45	0.81	0.52
	5.38	100.00	100.00

Conclusion
I think I have stayed minted in 2023 despite spending more and my share prices falling because I had a good margin of unused income at the start of the year. I have, however, done less well than I might have in that I have underperformed the UK stock market. I will hope for a turning point in my favour in the markets and also consider some portfolio changes.

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.