Financial review at 31 December 2019

Twelve months Summary

This is an update on my previous reviews of four and six months ago.

A total return for the year of 20.24% growth, slightly above the FTSE All Share total return index growth of 19.17%, results after draw down expenditure in a capital uplift of 15.87%.

Six years of drawdown results

As I am not earning any income from employment any more, I am in draw down in that I am drawing down some of my financial assets each month to cover our spending. I have been in draw down since December 2013 so the six years since then will be the main time period under review. 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, an equity index, and the “safe withdrawal rate” (SWR).

Inflation (RPI)

My chosen inflation index is the retail price index. I have chosen this one because it has the longest history, it is perhaps more inclusive than other rival indices, it tends to be higher than these rivals, and is favoured less by politicians.  In 6 years the RPI index has increased by 15.23% (I have estimated the figure for December).

Equities (FTSE UK All Share)

My chosen equity index is the FTSE All Share total return index. I have chosen this one because I live in the UK and the majority of my portfolio is invested in UK equities. This index also has a history that extends back to when I started investing in 1986. In 6 years the FTSE UK All Share total return index has increased by 45.53%. If I chose to invest in funds that attempt to passively replicate and track the index these would return less than the index because of fees and tracking errors. A typical unit trust tracker (M&G Index Tracker Fund Sterling A Acc) had a total return of 41.56%.

“Safe Withdrawal Rate” (SWR)

This approach 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.

Capital

My capital has increased by 22.69%. This compares to an increase in RPI inflation of 15.23% (I have estimated the RPI figure for December).

Year end	Capital	Growth	RPI	Growth
2013	100.00		100.00
2014	100.18	0.18	101.62	1.62
2015	96.05	-4.13	102.84	1.20
2016	106.87	11.27	105.41	2.49
2017	117.30	9.77	109.75	4.12
2018	105.88	-9.74	112.71	2.70
2019	122.69	15.87	115.23	2.24
	as % of 2013 assets

Income

My income has increased from 3.53% to 5.38% of my original capital. This compares to the income according to the “safe withdrawal rate” which has increased from 4.00% to 4.61%, based on inflation from December 2013 to December 2019.

Year end	4% Rule	Income
2013		3.43
2014	4.00	3.53
2015	4.06	3.81
2016	4.11	3.92
2017	4.22	4.63
2018	4.39	4.89
2019	4.51	5.38
2020	4.61
	as % of 2013 assets

Expenditure

My expenditure has increased by 32.87%. This is more than double the inflation increase and reflects some choices made in 2015/2016. I would be prepared to undo some of those choices in the future if that were needed. In the meantime I take comfort from the fact that income growth has exceeded this expenditure growth.

This year my spending as a percentage of my income is 78.10%. Expenditure is running at an annual rate of 3.67% of the average asset value during the 2019 year.

Year end	Income	Expenditure	Growth	RPI	Spend %	Expenditure
2013	108.40	100.00		100.00	92.25	-3.52
2014	111.58	92.27	-7.73	101.62	82.69	-2.91
2015	120.61	104.79	13.58	102.84	86.88	-3.38
2016	124.12	122.16	16.58	105.41	98.42	-3.81
2017	146.58	123.34	0.97	109.75	84.14	-3.48
2018	154.75	126.19	2.31	112.71	81.54	-3.57
2019	170.13	132.87	5.29	115.23	78.10	-3.67
	as % of 2013 expenditure					as % of year average assets

Total return

The portfolio total return has been 51.17%. This compares to 45.53% from the FTSE All Share total return index and 41.56% from the M&G Index Tracker Fund Sterling A Acc, a typical index tracker fund. I can’t compete with the total return of global and US equity indices because of my preference for UK and Asian equities.

Year end	Total Return	Growth	Index	Growth	Tracker	Growth
2013	100.00		100.00		100.00
2014	103.14	3.14	101.18	1.18	99.69	-0.31
2015	102.28	-0.83	102.17	0.98	101.29	1.61
2016	118.24	15.60	119.29	16.75	116.54	15.05
2017	134.39	13.66	134.91	13.10	131.46	12.80
2018	125.72	-6.45	122.13	-9.47	119.69	-8.95
2019	151.17	20.24	145.53	19.17	141.56	18.27

Income growth

Income has grown by 56.94%. The portfolio income yield has increased from an annual rate of 3.82% in 2013 to 4.70% in 2019. This is calculated on the average asset value during the year.

Year end	Income	Growth	RPI	Growth	Income Yield
2013	100.00		100.00		3.82
2014	102.93	2.93	101.62	1.62	3.52
2015	111.26	8.10	102.84	1.20	3.89
2016	114.50	2.91	105.41	2.49	3.87
2017	135.22	18.10	109.75	4.12	4.13
2018	142.75	5.57	112.71	2.70	4.38
2019	156.94	9.94	115.23	2.24	4.70
	as % of 2013 income				as % of year average assets

Conclusion

My current main objective continues to be income growth rather than total return. Compound income growth is running at about 8% per annum. This is derived from increases in the dividends paid per share, from re-investing any unspent income, from re-positioning the portfolio towards higher yielding investments, e.g. high yield bonds and commercial property, and from remaining focused on the higher yielding stock markets in the United Kingdom and Asia. I have had to steer clear of lower yielding markets such as the USA.

Markets seem buoyant since the election but some concerns are ongoing and volatility in capital values is always a possibility. If that were to happen then I will aim to stay invested on the basis that any volatility would be short lived and the investment trusts I hold should be able to maintain or even increase their dividends.

Income growth has stalled a little in the last two months as I took the precaution of going global and also increased my cash holdings. I currently want to further raise my portfolio income but I expect to move towards more of a total return objective in the years ahead.