Margin of safety, February 2023

Source: Pixabay

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

Chart by Visualizer

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

Chart by Visualizer

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.

YearPrior 12 mthsLast 12 mthsChange %
Income100.00102.002.00
Essential24.1727.0011.71
Luxury16.0418.0212.38
Discretionary21.5720.67-4.15
Expenditure61.7865.706.35
Income – Expenditure38.2236.30-5.02

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.

Better times ahead, January 2023

Source: Pixabay

January

It was reported in a monthly market review by J. P. Morgan that “January has shown that after a difficult 2022, and with inflation now falling, both equities and bonds can deliver positive returns for investors.” They added that in the UK ”core inflation remained steady at 6.3% year on year” and “business surveys continued to indicate that a recession is likely.” They noted that “despite the weak [UK] economic data, the FTSE All-Share rose.” I think the market might be anticipating better times ahead.

My benchmark, the FTSE All Share Total Return index rose by +4.50% in the first month of 2023. My investment return for the month was a gain of +2.81%. I’m ahead of last month but behind the index again.

My individual holdings recorded an unweighted average share price movement of a gain of +2.75% for the year so far. They ranged from a loss of -3.77% to a gain of +6.80%. My worst performer was a high yield bond fund. My Asia Pacific Income holdings were all strong performers whereas my UK Equity Income holdings mostly underperformed the UK index. A month is a short time to make this comparison and portfolio dividends are low in January, but this is a continuation of a trend of underperformance.

Capital

Chart by Visualizer

Starting from an index value of 100.00 on 31 December 2013, my capital is now 137.93, as shown in the graph above. This is -2.18% down from its all-time peak in March 2022. Investment return for the month of a capital gain of +2.59% and dividend income of +0.22%, results in a gain of +2.81%. Draw down expenditure deducted -0.28% this month. Therefore, capital was up 2.53% for the month.

Income

Chart by Visualizer

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 7.05% at this month end, as shown in the graph above. My current portfolio dividend income yield is 5.11%, i.e., 7.05 divided by 1.3793.

Investment changes

Portfolio income rose slightly in the month even though I sold shares early in the month. The shares yielded around 5% from dividends received at the time of sale whereas the proceeds will earn interest of 2.5% in my bank deposit account. Fortunately, some dividend increases were announced, and some dividends received were re-invested. These both raised the current level of portfolio income. More than half of the dividends receivable this February have been increased since last February.

Also, during the month dividends received in my tax-sheltered accounts were re-invested and dividends received in my trading account were paid out.

Portfolio

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

Yield %Capital %Income %
UK3.8333.7725.30
Asia Pacific5.2826.0426.90
Global4.1418.9515.34
Property7.6712.3718.55
Bonds8.787.8613.51
Cash2.041.010.40
5.11100.00100.00

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, Property
Income & Growth3% to 4.5%Global, Asia Pacific
Growthbelow 3%UK

Yield %Capital %Income %
High Income8.7723.7740.76
Income4.7126.7624.66
Income & Growth4.0937.4329.92
Growth1.9711.034.25
Cash2.041.010.40
5.11100.00100.00

Cash

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 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 March or April. I’m very gradually selling down my dealing account shares whilst I leave my tax-sheltered accounts to continue to grow.

Expenditure

Draw down spending was 63.73% of my portfolio income in the last twelve months which is less than the figure of 64.08% for the previous twelve months. Portfolio income rose by 3.43% as more dividend income was received. Expenditure rose by 2.87%.

This table compares the last two years.

Year12 mths to 31.01.2212 mths to 31.01.23Change %
Income100.00103.433.43
Essential25.5725.710.54
Luxury16.3218.7014.60
Discretionary22.1921.51-3.06
Expenditure64.0865.922.87
Income – Expenditure35.9237.514.43

Note: as % of 12 mths to 31.01.22 Income

Total essential spending is only 0.54% higher than last year because our MOT and car service were much reduced, and because council tax is lower as a result of timing differences arising from changing our payment method. These savings have mostly covered increased costs elsewhere. Year on year grocery spending is now about 8% higher. I think that could double by the autumn based on recent bills. The big rise in energy costs has not yet hit. Energy costs are only 5% up. I think that could rise to 70% up by the end of 2023.

Discretionary spending was 3.06% lower because of some choices we made. This spending is likely to rise this year as we are choosing to undertake some home improvements.

Luxury spending was 14.60% higher, mainly because we spent more on holidays, dining out and entertainment.

Conclusion

The first month of the new year has seen my portfolio capital recover to be only 2.18% below it’s all-time peak. Portfolio income reached another new peak. It was, however, disappointing to see my total return trailing the UK index yet again.

At the end of the year, December 2022

Source: Pixabay

The newspaper report told me that “the FTSE 100 was the world’s best performing major stock index during a miserable 2022 for financial markets.” Total returns of 4.6% for this index of the UK’s largest companies compared well with a fall of over 20% for both the US S&P 500 index and the UK FTSE 250 index of mid cap companies.

December

The FTSE All Share Total Return index fell by -1.42% in the month and has risen by +0.34% for the full year of 2022. My investment return for the month was a loss of -0.43%. Cumulatively I have a loss of -0.97% for the full year of 2022. That’s -1.31% behind my benchmark index. On a two year view I am also behind but on a three year view I am ahead of this UK index.

My individual holdings recorded an unweighted average share price movement of a loss of -8.52% for the year so far. My worst performers are in the UK small company (-39.45%), and commercial property ( -37.17%) sectors. These are some of my smaller positions. My best performer, up +15.40%, is in the global equity income sector. Overall, my portfolio choices this year have underperformed my benchmark UK index.

Capital

Chart by Visualizer

Starting from an index value of 100.00 on 31 December 2013, my capital is now 134.54, as shown in the graph above. This is -4.59% down from its all-time peak in March this year, and-4.03% down for the full year of 2022. Investment return of a capital loss of -5.99% and dividend income of +5.04%, results in a loss of -0.95%. Draw down expenditure deducted a further -3.08% during the year so far.

Income

Chart by Visualizer

Annual dividend income as a percentage of the opening portfolio value on 31 December 2013 has increased from 3.37% to reach a new peak of 7.04% at this month end, as shown in the graph above. My current portfolio dividend income yield is 5.23%, i.e., 7.04 divided by 1.3454.

Investment changes

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 made.

Portfolio

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

Yield %Capital %Income %
UK3.9834.2526.04
Asia Pacific5.4925.3826.61
Global4.1119.4115.26
Property7.9412.0618.31
Bonds8.458.3813.53
Cash2.460.530.25
5.23100.00100.00

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

Yield %Sectors
High Incomeabove 6%Bonds, Property, Asia Pacific
Income4.5% to 6%UK, Property
Income & Growth3% to 4.5%Global, Asia Pacific
Growthbelow 3%UK
Yield %Capital %Income %
High Income8.8523.9940.57
Income4.9127.0225.34
Income & Growth4.1437.4029.58
Growth2.0111.074.26
Cash2.460.530.25
5.23100.00100.00

Cash

My annual drawdown spending is now around 3.35% 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. In January I expect to sell some shares to raise cash again. That will slightly reduce portfolio income below the recent peaks.

Expenditure

Draw down spending was 62.30% of my portfolio income in the last twelve months which is less than the figure of 63.67% for the previous twelve months. Portfolio income rose by 3.26% as more dividend income was received. Expenditure rose by 1.04%. This table compares the last two years.

Year20212022Change %
Income100.00103.263.26
Essential25.3124.76-2.15
Luxury16.0318.2413.79
Discretionary22.3321.33-4.50
Expenditure63.6764.331.04
Income – Expenditure36.3338.937.15
as % of 2021 Income

Perhaps surprisingly essential spending is lower than last year. Year on year groceries were only up 5% but weekly grocery bills in recent weeks are up by about 15% compared to one year ago. Energy costs for 2022 were 25% lower than 2021 because we were overcharged last year and were refunded this year. Council tax was also lower, by 13%, in 2022 because of timing changes resulting from changing payment methods. Those are our top three essential spending items. We expect them all to increase in 2023.

Discretionary spending was also lower this year. This was because of some choices we made such as stopping or reducing some subscription payments. Luxury spending was higher this year. We spent more on holidays, dining out, entertainment and clothes.

Conclusion

After what was described as a miserable year for the markets my UK bias helped to limit my losses to below 1%. A drawdown of only around 3% leaves my capital only 4% down for the year. Hopefully that reduction can be recovered in 2023.

Three-year review to November 2022

Source: Pixabay

Three years ago on 30 November 2019, things were different. In the UK we were amid a general election campaign. A choice between getting Brexit done and levelling up or embarking on the Corbyn experiment – or so we were told. We had not yet heard of Covid-19 or learned of its impact on lives, economies and investment portfolios. I sold some shares to raise cash levels just ahead of the election. As things turned out I didn’t need to do that for the election, but it was useful to have more cash during the Covid stock market meltdown. We have now endured the Covid pandemic, and the lockdown of the economy, followed by a cost-of-living crisis exacerbated by the Russian invasion of Ukraine. I thought this would be a useful juncture to review our financial position. How had all these events impacted on us in pounds, pence, and percentages?

Benchmarks

I have chosen to compare our results against the UK price inflation measures of CPI and RPI. These are running at annual rates of 10.66% and 14.00% at present and have risen by 16.77% and 23.13% in total over the three years. As a UK based investor, I continue to use the FTSE All share total return index and a unit trust (M&G Index Tracker Fund Sterling A Acc) that aims to track that index for comparison.

RPI InflationCPI InflationFTSE AS TRUK Tracker UT
30/11/2019291.00108.507,585.91143.83
30/11/2022358.30126.708,512.84158.50
Change67.3018.20926.9314.67
Change %23.1316.7712.2210.20

Review Summary

I have looked at the key measures of household expenditure, portfolio annual income, portfolio capital value, and my calculation of investment return.

ExpenditureIncomeCapitalInv return
30/11/20194.135.59117.42100.00
30/11/20224.427.02134.28113.13
Change0.291.4316.8513.13
Change %6.9525.6414.3513.13

Capital

Chart by Visualizer

Starting from an index value of 100.00 on 31 December 2013, my capital had increased to 117.42 by November 2019, and to 134.28 by November 2022. The contributors to this increase of 14.35% are shown in the graph above. Most of the growth results from inherited funds (11.88%). Investment income exceeded expenditure and capital losses combined and contributed the remainder.

Investment return

I used these items to calculate my investment return.

Opening100.00
Inherited11.88
Capital growth-4.25
Investment Income17.46
Expenditure-10.72
Closing114.37

Money added in (inherited funds received) exceeded money taken out (for expenditure). Investment returns comprised investment income and capital losses.

Money in/(out)1.16
Investment return13.20
Inv return calculation13.13

The calculation I use is = (Closing -Money in/2)/ (Opening +Money in/2) x100-100. =(114.37-1.16/2)/(100+1.16/2)*100-100

I am pleased to see that my investment return of 13.13% exceeds my benchmark returns of 12.22 and 10.20. My investment return is likely to be below that of global markets and it may be that I should review my choice of benchmarks.

Investment changes

I stayed invested throughout the difficulties of the last three years. I sold shares to raise cash every few months. I sold and bought to use my annual ISA allowance. I switched holdings occasionally. Looking at the investment portfolio now and three years ago about 80% is now held in investments that were held three years ago. 20% is in new holdings. Some lower yielding UK equity income trusts were sold. Trusts in the property, UK equity income, UK small company, and Asia Pacific small company sectors were purchased. On average these purchases are higher yielding than those sold. This has boosted portfolio income.

Income

Annual dividend income as a percentage of the opening portfolio value on 31 December 2013 of 3.37%, had increased to 5.59% by November 2019, and to 7.02% by November 2022. The 25.64% increase in portfolio income over the four years was the result of the addition of inherited funds, the reinvestment of dividends received, increases in dividends paid, and portfolio switches and sales. About half of the increase (+14.37%) can be seen as a result of the increase in the portfolio capital, mainly from inherited funds and is a non-repeatable one-off. The other half of the increase (+11.27%) can be seen as a result of the portfolio income yield percentage being higher. This higher income yield on the portfolio suggests to me that the capital value could increase if dividends are not cut. I am pleased to see that this income growth of 25.64 has exceeded the inflation benchmarks of 23.13 and 16.77. Going forward I think my income growth will likely fall behind inflation if high inflation is prolonged. I am not too keen to chase any more yield from my portfolio.

Expenditure

Annual expenditure as a percentage of the opening portfolio value on 31 December 2013 of 3.24%, had increased to 4.13% by November 2019, and to 4.42% by November 2022. The 6.95% increase in expenditure is well below the inflation benchmarks. The recent higher inflation has impacted mainly on our grocery spending but only over the last three or four months. I expect the higher energy costs to begin to hit only in January 2023. Some other price increases have been balanced by reducing spending. We can choose to accept some price increases (Apple Music) but can choose to cancel some purchases when the price is increased (Investors Chronicle). Most of our spending is luxury or discretionary so we have some choices here.

Conclusion

I was pleased to see that investment returns were at least ahead of the UK index on this three-year view. Income growth that was not a one-off exceeded our expenditure increase although it fell short of the inflation indices. It is useful to conduct this review, so we know where we are financially. Overall things are OK for us.