Opening moves

Source: Pixabay

The newspaper reported that “the UK’s FTSE 100 index fell 168 points to 6,483, a 2.5% drop – the biggest one-day fall in percentage terms since the end of October.” (Guardian 26.02.21). Checking my source on the FTSE All Share Total Return index, my chosen benchmark, that had gone down -2.28% on the day. For the month of February, however, it was up by +1.99%, and it was up by +1.16% for the opening two months of the year. As I write on Monday 1 March the FTSE 100 has recovered more than half of Friday’s losses.

My investment return for the first two months of the year was a fall of -0.46%. My individual holdings recording share price movements ranging from a loss of -7.27% to a gain of +5.02% with an unweighted average result of a loss of -1.01%.

Capital

This capital graph shows the portfolio value at each month end since 31 December 2013, taking an index value of 100.00 as the starting point. This capital measure on the graph is now at 125.87. At the end of February 2021, the capital value of my investment portfolio is down by -0.92% since its’ peak of 127.04 at the end of the 2020 year. Investment returns were a loss of -0.46%, and draw down expenditure deducted -0.46% for the two months.

Income

I have tracked the annual level of my dividends received since 31 December 2013 as shown in the income graph. This income graph shows the annual dividend income as a percentage of the opening portfolio value. My income has increased from 3.37% on 31 December 2013 to reach a new peak of 6.60% at 28 February 2021. This slightly exceeds the previous peak in July 2020. The portfolio income has now recovered from the dividend cut last August by a property REIT that I still hold.

After two months of the year portfolio income has increased by +2.03%. The income measure on the graph rose to 6.60%. That is a 96.12% rise since draw down started on 31 December 2013. The increase was the combined result from the automatic re-investment of dividend income in more shares, from dividend increases announced, but mostly from a portfolio change. I halved my position in that property REIT and bought a new position in another property REIT that has a higher dividend yield. This may amount to reaching for yield but it also diversifies my property risk between two different Real Estate Investment Trust’s. Each holding is now less than 3.5% of my portfolio. It has taken nearly six months for my disappointment at the dividend cut to lead to a partial sale. That was my opening move for this year.

Portfolio

The table below shows the composition of my portfolio at the end of the month. This has been analysed by sector, that is by geography for equities, or by type for non-equities.

 Yield %Capital %Income %
UK4.6139.9435.08
Asia Pacific5.0124.7523.64
Global4.6118.8116.54
Bonds8.737.6912.80
Property9.086.8611.87
Cash0.171.950.06
5.24100.00100.00

I have also analysed based on the income and growth characteristics of each holding. I have classed my holdings as high income (dividend yields greater than 6%), as income (yields between 4% and 6%), as growth and income (yields between 3% and 4%), and as growth (yielding less than 3%). As mentioned in my last post I aim in the future to gradually reduce my investment in high income holdings and increase my investment in growth holdings.

 Yield %Capital %Income %
High Income7.5335.3050.68
Income4.8031.6828.97
Income & Growth3.9123.2617.35
Growth1.987.812.94
Cash0.171.950.06
5.24100.00100.00

Cash

My annual draw down spending is now around 3.41% 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 seven months of spending. In addition to this, dividends being paid out each year are sufficient to cover about four months of spending. My other dividends received are being immediately re-invested in more shares in order to grow my income. This cash position means I will need to sell some investments in the next few months in order to cover spending. I may sell something this month before the end of the tax year. I will be interested in any budget moves by the Chancellor to increase Capital Gains Tax rates. I may sell in order to pay only the current 10% tax rate on my gains rather than any higher rates that may be introduced. Investment sales in late March from my dealing account can fund future spending but can also fund an investment in my ISA for the next tax year commencing on 6 April.

Expenditure

Draw down expenditure was only 53.1% of my portfolio income for the last twelve months. This compares to draw down spending being 80.42% of my portfolio income in the previous twelve months. Portfolio income has risen by 25.15% whilst expenditure has fallen by 16.26%. This is quite a significant turnaround. The fall in spending looks likely to be mostly a result of lockdown restrictions curbing some opportunities to spend. The increase in income is likely to be a combination of inheriting extra capital, and the growing snowball effect of dividend reinvestment and dividend increases. I think there are also some short-term timing benefits from portfolio changes and from the REIT dividend that was later cut. Certainly, my current calculation of portfolio income is less than was received in that last twelve months.

Conclusion

From this point my next move should be to use any further increase in portfolio income as an opportunity to switch out of some of the higher income holdings and into some new growth holdings.

New year and a new priority

Source: Pixabay

I have prioritised income growth for the past seven years since I left my last job. My portfolio income has nearly doubled in that time. In this new year my priority is to sustain my current income levels whilst aiming for more capital growth.

January

Despite much excitement and significant price movements in the trading of GameStop in the USA, and in Bitcoin, the UK stock market enjoyed only a modest rise in the first few days of the year before falling back below the opening year position. The FTSE All Share Total Return index which covers capital and income returns from all UK listed shares recorded a small loss of -0.81% in January 2021.

My investment return for the month was a fall of -2.37%.

My individual holdings recording share price movements ranging from a loss of -6.23% to a gain of +1.72% with an unweighted average result of a loss of -2.56%.

Capital

This capital graph shows the portfolio value at each month end since 31 December 2013. Starting at an index of 100.00 this has varied between a low of 87.43 at 31 March 2020 and a high of 127.04 on 31 December 2020.

At the end of January 2021, the capital value of my investment portfolio is down by -2.59% since its’ peak at the year end. Investment returns were a loss of -2.37%, and draw down expenditure deducted -0.22% in the month. The capital measure on the graph fell to 123.75.

Income

I have tracked the annual level of my dividends received since 31 December 2013 as shown in the income graph. This income graph shows the annual dividend income as a percentage of the opening portfolio value. My income has increased from 3.37% on 31 December 2013 to peak at 6.58% on 31 July 2020.

In January portfolio income increased by +0.28%. The income measure on the graph rose to 6.49%. That is a 92.75% rise since draw down started on 31 December 2013. The increase was mostly the result of the automatic re-investment of dividend income in more shares, but also partly from dividend increases announced.

Portfolio

The table below shows the composition of my portfolio at the end of the month. This has been analysed by sector, that is by geography for equities, or by type for non-equities.

 Yield %Capital %Income %
UK4.7039.3535.29
Asia Pacific5.0724.7923.97
Global4.6019.0216.71
Bonds8.757.8113.02
Property7.827.3310.94
Cash0.211.700.07
5.24100.00100.00

The next table below is the same portfolio but analysed based on the income and growth characteristics of each holding. I have classed my holdings with dividend yields greater than 6% as high income. I expect most of their returns to come from dividends. Those yielding between 4% and 6% are classed as income, and those between 3% and 4% as growth and income. Holdings yielding less than 3% are classed as growth. I expect most of their returns to come from share price growth.

 Yield %Capital %Income %
High Income7.3635.9150.40
Income4.8831.4629.27
Income & Growth3.9522.9417.27
Growth1.967.992.99
Cash0.211.700.07
5.24100.00100.00
 Yield %Sectors
High Incomeabove 6%UK, Asia Pacific, Bonds, Property
Income4% to 6%Global, UK, Asia Pacific
Income & Growth3% to 4%UK, Asia Pacific, Global
Growthbelow 3%UK

Going forward as dividend reinvestment and dividend increases raise my portfolio income then I aim to gradually reposition my investments away from high income holdings which are currently 35% of the portfolio and towards growth holdings which are only 8% of the portfolio. I am hopeful that there will be no more dividend cuts from any of my holdings. I am relying on these investment trusts using their retained revenue reserves to supplement the dividends they receive so as to maintain or increase their dividends. Any dividend cuts will impede my strategy.

I remained inactive in January with no trades other than automated dividend reinvestments.

Cash

My annual draw down spending is around 3.46% 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, dividends being paid out each year are sufficient to cover about four months of spending. My other dividends received are being immediately re-invested in more shares in order to grow my income. This cash position means I will need to sell some investments in the next six to nine months in order to cover spending. I will probably sell something in the next two months before the end of the tax year. I aim to stay fully invested so as to maximise portfolio income, but as I am 98.30% invested at present, I recognise that I will need to raise more cash soon.

Expenditure

Draw down expenditure for the last twelve months was 60.57% of my current portfolio income. This compares to draw down spending in 2020 being 62.54% of my actual portfolio income in 2020. Spending this January was lower than last January, and current income is higher than 2020 income.

Conclusion

Now that my portfolio income is significantly higher than my expenditure, I no longer feel a need to prioritise income growth. I am, however, reluctant to accept a lower level of income because I regard the excess income as a margin of safety. It means I have scope to absorb dividend income cuts or unexpected extra expenditure. Seeking more capital growth whilst I sustain my current income levels will likely be a slow process.

Seven years of Financial Independence

Source: Pixabay

Most financial blogs about financial independence, or “FIRE” (Financial Independence Retire Early), concern themselves with the journey to reach that objective. By contrast I aim to discuss that journey towards “Getting Minted” but I also aim to discuss what happens next. That is the journey to financial independence and beyond. After climbing to the summit of financial independence the challenge then is to sustain your capital assets as you incur drawdown spending and to stay minted. I now have had seven years of that journey to report on.

I am not earning any income from employment and I have been in draw down, drawing down some of my financial assets each month to cover spending, since December 2013. My five key performance indicators in this review are capital, income, expenditure, total return, and income growth. My key comparisons are with an inflation index, the “safe withdrawal rate” (SWR) and an equity index and tracker fund.

Inflation (RPI)

My chosen inflation index is the retail price index. After seven years the RPI index has increased by 16.18% (I have estimated the figure for December 2020).

“Safe Withdrawal Rate” (SWR)

This approach to drawdown suggests taking an income, or drawing down, only 4% of your available capital in year one and then increasing that amount by inflation each year. This “safe withdrawal rate” has increased from 4.00% to 4.65%, based on inflation from December 2013 to December 2020.

Equities (FTSE UK All Share)

My chosen equity index is the FTSE All Share total return index. After seven years the FTSE UK All Share total return index has increased by 31.25%. A typical unit trust tracker fund (M&G Index Tracker Fund Sterling A Acc) attempting to track the index had a total return of 27.53%. This is lower because of fees and tracking errors.

Capital

My capital has increased by 27.04% as shown in this table and graph.

 OpeningInheritedCapital growthInvestment IncomeExpenditureClosing
2014100.000.00-0.433.53-2.92100.18
2015100.180.00-4.633.81-3.3196.05
201696.050.0010.763.92-3.86106.87
2017106.870.009.704.63-3.90117.30
2018117.300.00-12.324.89-3.99105.88
2019105.880.0015.635.38-4.20122.69
2020122.6913.95-12.086.41-3.93127.04
100.0013.956.6232.57-26.10127.04

[as % of 2013 assets]

This increase is 13.09%, and is 3.09% below inflation, if the inheritance is deducted.

This graph shows only the year end positions with all bar one being above the opening value. A graph of the month end positions shows some nineteen month ends, out of eighty-four, as being below the opening value. That is something to get used to if you’re invested in such risk assets.

The graph on the top right of my blog home page also uses only the year end values and that takes a lot of the mid-year drama out of the graph.

Income

My income has increased from 3.53% to 6.41% of my original capital and has exceeded the Safe Withdrawal Rate for the past four years.

Expenditure

My expenditure has increased from 2.92% to 3.93% of my original capital and has stayed below the Safe Withdrawal Rate in every year as shown in this table and graph.

 Inv IncomeExpenditure4% Rule
20143.532.924.00
20153.813.314.06
20163.923.864.11
20174.633.904.22
20184.893.994.39
20195.384.204.51
20206.413.934.61

[as % of 2013 assets]

Total return

 Total ReturnIndexTracker
20143.14%1.18%-0.31%
2015-0.83%0.98%1.61%
201615.60%16.75%15.05%
201713.66%13.10%12.80%
2018-6.45%-9.47%-8.95%
201920.24%19.17%18.27%
2020-4.44%-9.82%-9.92%

[Total Return = (ending balance – ½ contributions + ½ withdrawals) divided by (beginning balance + ½ contribution – ½ withdrawals) minus 1 ]

I calculate that my portfolio total return has been 44.46%. This compares to 31.25% from the FTSE All Share total return index and 27.53% from the M&G Index Tracker Fund Sterling A Acc, a typical index tracker fund. My return would, however, be much lower than the return from global indices with their heavy US and technology weightings because of my preference for UK and Asian equities that pay out higher income.

Income growth

Income has grown by 87.074%. This compares well to inflation of 16.18% and expenditure growth of 24.20%.

Conclusion

My approach to drawdown has been to spend less than I receive from dividend income. I have been able to keep to that during the last seven years. In the last few months my property REIT holding cut its dividend. I sold another UK equity holding prior to a dividend cut. My other holdings in UK, global and Asia Pacific equities, and high yield bonds have all increased or maintained their dividends so far. Currently my expenditure is much lower than my dividend income so I can withstand some further cuts in dividends.

My main objective has thus far been income growth rather than total return. This was successful in that compound income growth was running at about 9% per annum up to March 2020. This was derived from increases in the dividends paid per share, from re-investing any unspent income, from re-positioning the portfolio towards higher yielding investments, and from investing in the higher yielding stock markets in the United Kingdom and Asia. Unfortunately, those last two steps amount to reaching for yield at the cost of impaired capital growth. My objective going forward now is to seek more capital growth whilst sustaining the current level of income. That means that dividend increases and dividend income in excess of expenditure can be used to buy new investments aimed more at growth. This may be a slow process.

2020 a year in review

Source: Pixabay

My newspaper reported that “the FTSE 100 suffered its worst 12 months since the financial crisis, despite a year-end rally fuelled by the start of Covid-19 vaccine rollouts.” This index of the largest UK listed companies incurred a loss for the year (-14.3%) that “was its biggest annual fall since 2008, when it plunged by almost a third.” They added that the FTSE 250, comprised of mid cap companies, fell by less (-6.4%) but still compared badly to international indices such as the US S&P 500 (up +16%) (The Times, 1 January 2021).

My preferred measure is the FTSE All Share Total Return index which covers capital and income returns from all UK listed shares and that recorded a loss of -9.82%. That was its worst result since 2008 but only marginally worse than the -9.47% fall in 2018.

My investment return for the 2020 year was a fall of -4.62%. My holdings are recording a share price movement ranging from a loss of -27.12% to a gain of 6.78% with an average result of a loss of -10.81%. Looking at unweighted averages my share prices fell by -0.85% (Asia Pacific), -11.03% (global), and -12.53% (UK). My high yield bond fund (-13.62%) and property REIT (-27.12%) were the worst performers with the latter also cutting its dividend. Overall, I calculate the capital return in total as being a loss of -9.84%, but this was mitigated by an income return of 5.22% from dividends received. These percentages are calculated on the opening capital for the year.

Capital

This capital graph shows the portfolio value at each month end since 31 December 2013. Starting at an index of 100.00 this has varied between a low of 87.43 at 31 March 2020 and a new high of 127.04 on 31 December 2020. Including mid-month dates the low was 71.46 on 19 March 2020. Funds inherited this year, and growth on them, contributed 17.48 towards the new high, so without that the value would be 109.56. There is thus an underlying capital gain of 9.56% over seven years.

At the year end the capital value of my investment portfolio is up by 3.55% for the year. Investment returns were a loss of -4.62%, draw down expenditure deducted 3.21%, but funds inherited in early April added 11.38%.

The timing of that has boosted capital returns by 2.87% and I calculate the underlying capital result as -12.71% and total return as -7.49%.

Income

I have tracked the annual level of my dividends received since January 2014 as shown in the income graph. This income graph shows the annual dividend income as a percentage of the opening portfolio value. My income has increased from 3.37% on 31 December 2013 to 6.47% on 31 December 2020, a 92.21% rise. My income measure peaked at 6.58% on 31 July before my property REIT cut its dividend. The 6.47% includes 0.69% from funds inherited this year, so without that it would be 5.78%. There is thus underlying income growth of 71.75% over seven years.

During the year portfolio income rose in every month except August and September. Portfolio income is now 1.73% below the peak in July. The dividend cut on my property REIT cut my portfolio income by -2.97%. Income elsewhere is rising now mainly because of the re-investment of dividend income in more shares rather than from dividend increases which have become scarce.

With dividends received for the whole 2020 year my portfolio income has grown by 19.17% compared to the previous year. 9.74% of that is from funds inherited during the year and 9.43% is from funds already held.

Portfolio and cash

 Yield %Capital %Income %
UK4.5139.9335.39
Asia Pacific4.9924.4223.95
Global4.4719.1016.75
Bonds8.587.7513.06
Property7.767.0710.77
Cash0.241.730.08
5.09100.00100.00

This table shows the composition of my portfolio at the end of the month.

My annual draw down spending is around 3.32% of my portfolio value, based on the last two years spending and the opening and closing values for last year. My cash holdings are sufficient to cover about six months of spending. In addition to this, dividends being paid out each year are sufficient to cover about four months of spending. My other dividends received are being immediately re-invested in more shares in order to grow my income. This cash position means I will need to sell some investments in the next six to nine months in order to cover spending. I only made one sale to raise cash in 2020 but will probably sell something in the next three months before the end of the tax year. I aim to stay fully invested so as to maximise portfolio income, but as I am 98.27% invested at present, I recognise that I will need to raise more cash soon.

Expenditure

Draw down expenditure for the last twelve months was 62.54% of 2020 portfolio income receipts, compared to 79.63% for the previous year. This spending was 6.40% down on the previous year, whilst income was up by 19.20%.

Conclusion

This was an eventful year for my portfolio of investments during which I remained very inactive. I watched markets fall but did not sell out so I did not have to judge when to buy back in. Nor did I switch my portfolio in the hope of getting better returns. With hindsight one could have profitably sold during February and bought back in late March, and one could have profitably switched into the winning technology funds in March. I did none of this. In being inactive I missed out on some opportunities but I avoided making any major mistakes. Being confident in my portfolio positioning, being focussed on income rather than capital, not needing to make big gains, and not wanting to risk bigger losses, all helped me to stay inactive.

I watched my portfolio fall 41.75% up to 19 March and then, partly boosted by inherited funds, rise by 77.78%. The year-end capital position is 3.55% higher than a year ago. I have prioritised income growth and it is good to see portfolio income 16.38% higher than a year ago. I need to ideally sustain current income levels whilst seeking out more capital growth in the year ahead.

What a difference a day makes

Source: Pixabay

On Monday 9 November as the stock market reacted positively to the emerging result of the US Presidential election, the news of a successful vaccine against the coronavirus was released. What a difference that day made. My portfolio recorded a gain of 4.80% on that day as my individual holdings rose between 2.00% and 8.23%.

Today’s newspaper states that “FTSE enjoys best month for 30 years” explaining that “the Footsie, which tracks London’s biggest listed companies, rose 12.4 per cent last month” (The Times, 1 December 2020). They report that it is the biggest percentage rise in a month since January 1989. I didn’t have much money invested then, but I do now. My portfolio recorded a gain of 16.06% in the month of November and my individual holdings rose between 4.89% and 30.19%. In cash terms it amounts to enough to cover four or five years of spending money.

The paper reported that the FTSE 100 was still 16.8 per cent below its high in February. My portfolio is still down on the year to date, despite inheriting some money, and all my holdings are recording a share price loss of between -1.64% and -32.69%, but this is a good recovery. I think more gains will follow.

My Asia Pacific holdings have held up best, followed by my global holdings, and all are less than 15% down this year. My UK holdings are more mixed, between 4.26% and 27.60% down, but on average are about 17% down, similar to my bond fund. My property REIT has been the worst performer with the dividend cut and the share price down 32.69%. It is partly because these holdings are still down on the year that I am hopeful for more gains.

Perhaps once the uncertainty of Brexit is removed by a deal or a no deal then UK shares can move ahead. Perhaps as vaccinations begin and restrictions are further eased then most shares, even property ones, can move ahead.

Capital

This capital graph shows the portfolio value at each month end since 31 December 2013. Starting at an index of 100.00 this has varied between a high of 122.69 on 31 December 2019 and a low of 87.43 at 31 March 2020. Including mid-month dates the low was 71.46 on 19 March 2020. The current value is 120.80. Funds inherited this year contributed 16.76 towards this, so without that the value would be 104.04. A 4.04% capital gain over almost seven years.

After eleven months of the year the capital value of my investment portfolio is down by 1.54%. I received some inherited funds in early April that added 11.37% so the underlying reduction was 12.91%. Of that total draw down expenditure was 2.76% so the investment result was a decline of 10.15%. There was a capital decline of 15.30% but income receipts have added back 5.15%.

Income

I have tracked the annual level of my dividends received since January 2014 as shown in the income graph. This income graph shows the annual dividend income as a percentage of the opening portfolio value. My income had increased from 3.37% to 6.58% by 31 July. It then fell to 6.38% at 30 September but has risen to 6.44% by 30 November. This includes 0.69% from inherited funds. Without that it would be 5.75%.

Portfolio income rose in October by 0.28% and in November by 0.63%, after falling by 2.51% in August and by 0.52% in September. This leaves portfolio income only 2.13% down from a month-end peak in July prior to the dividend cut on my property REIT. Income has risen because of the re-investment of dividend income in more shares. Dividend increases have been more scarce or else small or even token ones to maintain dividend hero status. I’ll settle for them not being reduced.

With dividends received or declared for the whole 2020 year my portfolio income has grown by 19.17% compared to the previous year. 9.74% of that is from funds inherited during the year and 9.43% is from funds already held.

Last time I wrote that I expected to receive 54 dividends in the year. I have now received 52 with only 1 in due in December giving a total of 53 for the year. This is one less than expected because the payment date on one dividend was moved from late December to early January. This makes no practical difference but it does help the 2021 year at the expense of the 2020 year.

Portfolio and cash

 Yield %Capital %Income %
UK4.7839.4835.37
Asia Pacific5.2824.3124.05
Global4.6519.2816.82
Bonds9.057.5812.86
Property8.406.8710.81
Cash0.182.480.09
5.33100.00100.00

This table shows the composition of my portfolio at the end of November.

My annual draw down spending is about 3.33% of my portfolio value. My cash holdings at the end of November were sufficient to cover about eight or nine months of spending. In addition to this, dividends being paid out each year are sufficient to cover about three or four months of spending. My other dividends received are being immediately re-invested in more shares in order to grow my income. This cash position means I will need to sell some investments in the next eight to twelve months in order to cover spending. I have only made one sale to raise cash in 2020 and don’t now expect to sell any more until 2021.

Expenditure

Draw down expenditure for the last twelve months (December 2019 to November 2020) was 60.72% of 2020 portfolio income receipts. I expect the 2020 year-end position to be close to this. This spending was 5.93% down on the previous twelve months. We spent less on holidays and eating out because of lockdown restrictions this year.

Conclusion

I aim to stay fully invested so as to maximise portfolio income. I am 97.52% invested now. I aim to sell only to raise cash to spend which would be less than 4% of my portfolio during a year and this year has been about 1%. Otherwise I only sell to reallocate or switch between holdings which I last did in September. I am not trying to time the markets. In my view the share price gains this month shows the importance of staying invested so you can benefit from such sudden rises.