Holding my own

Source: Pixabay

After six years and seven months on the road marked financially independent draw down I am holding my own in the most challenging year so far.

I maintain and update these graphs at each month end to help review longer term progress.

This income graph shows the annual dividend income as a percentage of the portfolio value at 31 December 2013. My income has almost doubled from 3.37% to 6.58%. An increase of 3.21%. Income from funds inherited this year contributed 0.69% of this, so without that the increase would be 2.52%.

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 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 107.14. Funds inherited this year contributed 15.47 towards this, so without that the value would be 91.67.

According to one definition holding your own means to maintain your position despite difficulties. I think that sums up my current view. I’m essentially maintaining my position in terms of my portfolio holdings and my investment approach for now. I’m certainly open to adapting them to changing personal circumstances and the evolving world situation but that will happen over the medium to long term. No knee jerk reactions or short term moves for me.

My portfolio remains in investment trusts in the UK equity income, global equity income, Asia Pacific income, Debt loans and bonds, and UK commercial property sectors. My approach is to pursue a high and growing income. I aim to remain essentially fully invested and to minimise portfolio turnover. I hold only a small cash reserve.

 Yield %Capital %Income %
UK5.6538.3235.26
Asia Pacific5.7524.5322.95
Global5.1519.3216.19
Bonds9.278.1012.22
Property12.446.5513.25
Cash0.233.190.12
6.15100.00100.00

I aim to stay fully invested so as to maximise portfolio income in the current near zero interest rate situation. I am 96.81% invested now. I aim to sell only to raise cash to spend or else to reallocate or switch between holdings. Clearly if you sold at the right time in say February and bought back in at the right time in mid-March then you could have made substantial gains. I don’t pretend that I can achieve that sort of timing.

I am reasonably comfortable with my cash position and available cash flow. Cash holdings currently would fund ten months of spending. At present dividends being paid out would fund four months of spending each year. My other dividends are being re-invested so as to further grow my income. I therefore need to make investment sales to cover eight months of spending each year, or else run down my cash reserve. My practice has been to sell shares every three months. Each sale would be for just under 1% of the portfolio. This year I have made only one such sale. I did raise extra cash last December just ahead of the election. Some of my inherited funds were received in cash.

In choosing in April to re-allocate my inherited funds to lower yielding international holdings I am beginning to nudge the portfolio away from all-out income growth and to reduce my home country bias. Going forward I will aim to maintain my current level of portfolio income whilst re-allocating in favour of both international and smaller company investment trusts. If dividends are not reduced then I can move more quickly on this.

This year

After seven months of this exceptional year the capital value of my investment portfolio is down by 12.68%. I have incurred draw down expenditure of 1.73%. My investment portfolio has declined by 22.32%, but I received some inherited funds in early April that have served to shore up my position.

With dividends received or declared for the first eight months of the year my portfolio income has grown by 24.04% compared to the same point last year. This included 7.54% from the inherited funds but 16.50% from the existing portfolio. As yet no dividends have been reduced! If that continues to hold true then my expectation is for income growth of 22.65% for the twelve months, with 9.64% from the inherited funds and 13.01% from the existing portfolio. This prospective income growth compensates somewhat for the currently disappointing capital returns.

Expenditure in the first seven months of the year is 8.25% down on the same period last year. This is because we have had fewer opportunities to spend since lockdown. In 2019 expenditure was only 78.10% of income. Increasing income and reducing expenditure could mean that expenditure will only be 62.15% of income this year.

My commercial property holding has been reporting reasonable news but I still await news on the next quarterly dividend. The share price of this holding has given an exciting ride. A near 60% fall from best to worst prices earlier in the year has been followed by a volatile recovery. Save for reinvesting the last quarterly dividend I have thus far resisted selling out or buying more. Having 6.55% of my portfolio in this holding is enough and hopefully not too much.

More robust and less fragile?

In a comment on my previous post it was suggested to me that my position was “pretty fragile” given that “equities may fall 50%” and “dividends may be cut 50%” and that my “margin of safety seems quite small”. This is useful feedback that helps me to test my own thinking.

I have experienced equities falling 50% around 2002 and again around 2008 so I stand ready for that variability. Interestingly we haven’t had a 50% fall this time. At least not yet! In 2002 and 2008 I wasn’t in draw down but although company dividends would have fallen investment trust dividends were mostly maintained or increased. Having a revenue reserve of around one year’ s dividends enables them to be sustained for a time. That is part of my margin of safety, so I’m watching the dividends. As we are spending significantly less than our current dividend income that provides a further margin of safety. Spending could also be reduced further if that were needed. We also have a small cash reserve. I’m hopeful that these factors prove to be robust rather than fragile. Time will tell (stay tuned).

We could raise more capital by moving house to a smaller property or a cheaper area but we wouldn’t want to do that. I’m not looking to go back to work and I’m not sure what my prospects would be nearly seven years on and with higher unemployment. We are debt free but would like to keep it that way. So, none of these options are up for consideration, and only the first offers some margin of safety.

Income investing has not given me good capital returns this year, and my UK home bias has not helped either. It has, however, allowed me to build up a good level of portfolio income that will hopefully be robust. Going forward I’m looking to gradually move my portfolio towards more exposure to international markets and to smaller companies that are growing, whilst ideally sustaining my current level of portfolio income.

16 Replies to “Holding my own”

  1. Thank you for continuing to share your journey.

    Your capital position seems pretty much as I surmised in June. Am I correct in assuming the capital graph above has no inflation correction?

    Some people speculate that the capital position after the first decade is critical, see, for example: https://earlyretirementnow.com/2020/07/15/when-can-we-stop-worrying-about-sequence-risk-swr-series-part-38/

    Looking forwards, I still feel your cash buffer is too small to tide you through a prolonged bear. On the other hand you may be due to receive some pension income (or similar) soon and that may help to address this concern. IMO, you were a bit financially lucky this time – via an inheritance – and that is possibly unlikely to repeat.

    As always, I wish you well as you re-shape things going forwards.

    • Thanks for your comment. There is no inflation adjustment on the capital graph. Interesting link but a bit heavy on the math. It seems to suggest a 0.6% chance of running out of money within the next twenty years if your capital falls 0% to 25% in the first ten years. It further suggests that there is no chance of running out of money if your capital has not fallen. I’m not counting on either being true. A cash buffer of ten months spend is not a lot, I agree, but I prefer to keep the 6.15% income from staying invested to the 0.25% interest available on cash. I will be eligible for the state pension within the next ten years but I’m not counting on that. The inheritance is likely not repeatable as my parent’s generation in my family have all passed on now.

      • I think your sentence that starts “A cash buffer of ten months ….” may be better phrased as: ” A cash buffer of ten months is not a lot, I agree, but I prefer to keep the possibility of a 6.15% income from staying invested to the 0.25% interest available on cash”.
        Your choice of course.
        However, this approach is not without risk.

          • Indeed.
            Have you ever considered tracking “fundedness”, by which I mean the ratio of your current assets to your remaining lifestyle needs?

  2. Interesting read, particularly your comment that you continue to reinvest some of your dividneds to further grow your income.

    In my mind, I had envisaged that once I was relying on my dividend income for my expenses, I would just leave any ‘surplus’ dividends received as cash but your comment has got me thinking that if I had enough of a cash buffer already, why not continue to invest?

    Something to ponder on further!

    • Thanks for your comment. Last year my spending was only 78.10% of my portfolio income so the balance was available to reinvest. I currently favour reinvesting instead of building up cash. If this year my spending falls to 62.15% of income then I can reinvest more and will be saving a higher proportion of income than when I was working.

  3. interesting update.

    So excluding the inheritance (which if evaluating portfolio performance of course) your capital value would be 91 a decline of 9% since 2013 in nominal terms and substantially more in real terms. And that is in a ‘bull market’. Seven years is too short a time period to make any definitive conclusions but it suggests your portfolio is over distributing through giving you a return of capital as well as a return on capital. It is also a substantial underperformance against something such as the FTSE All World Index. Although that may not be repeated and I’d be understandably nervous at flipping into an All World Index tracker given your holdings are a likely imperfect proxy for value investing at the moment.

    It does seem from your writings that you’d prefer an investment that did – starting capital value of 100, income of 4, income of 4, ending capital value of 99 than one which did starting capital value of 100, income of 2, income of 2 ending capital value of 104? it doesn’t make much mathematical sense to me but I understand the psychological preference.

    Like Al Cam, I would be very concerned with the size of the cash buffer but that would be my own personal risk profile particularly if I was not earning. In any event, it is very unlikely in the early years that anyone will be able to be proved right or wrong. The challenge is your portfolio (and others in your position) likely needs to last a minimum of 30 years with say a 10% chance of needing to last 50 years / 20% to 40 years (probability of one half of a couple in their 50’s living to 100 & 90 respectively) and it will likely only become proven if there is a problem or not a number of years down the line.

    It’s worth pondering what the portfolio performance might have been without such government stimulus though.

    I do understand a reticence to deviate from your current path. The medicine would be quite painful. Particularly if you don’t believe it is necessary, which it may not. As always, I am at pains to indicate that I do not know what will happen whilst recognising using historic data (particularly the last ten years, or the 2008 bear market) to extrapolate the portfolio performance into the future is suspect. The challenge is cut spending and increase probability of success which may turn out to be unnecessary. I would certainly not be reaching for yield though, which is dangerous as it concentrates investors in a portfolio of stocks that are very low growth. Mind you these seem currently v cheap compared to the S&P 500 so who knows?

  4. Thanks for your comment. I don’t think I’m over distributing but we will see whether my capital recovers to beat inflation again and whether my dividends can be sustained. You’re right that I prefer my portfolio to deliver an income return, say 4%, that will cover my spending, rather than one that delivers 2% income and requires say a 2% sale of capital each year. It is, I agree, a psychological preference. The life expectancy for my age is 85 years but I would want my portfolio to last until 100 years or more, ideally with my capital intact and beating inflation. I think I’ve reached for enough yield so I’m now looking to nudge the portfolio towards more of an international and smaller company bias.

  5. @Al Cam
    Thanks for your question. I’m not sure I follow the definition of “fundedness” you are using. The ratio of current assets (say 100%) to remaining lifestyle needs (say between 3% and 4% per year) gives me between 25 and 33 years compared to a remaining life of up to (optimistically!) 40 or 50 years. That’s without selling the house.

  6. Thanks for clarifying. My quick look above suggests I am about 64% funded with various factors ignored or simplified. A fuller calculation would take a whole new blog post.
    For now I prefer to take a more short term view and use portfolio income (natural yield) as the basis for considering myself funded. On that basis I was 118% funded from 2014 to 2019. I only spent 85% of my income.

    • Happy to help.
      64% seems a tad low to me.
      In arriving at this estimate, I suspect that you may have:
      a) assumed you live to 100 – which IMO is not unreasonable;
      b) ignored any state pension cash flows – which IMO is unreasonable;
      c) implicitly assumed your future investment returns match inflation – ie not, in effect, applied any real discount to your future cash flow needs – this is possibly a tad conservative.
      In any case, you are correct that it does take a bit of work to generate the fundedness values – and, like all good metrics, it is critically dependent on a few key assumptions and is definitely not guaranteed or in anyway prescient!

      Notwithstanding these details, a fundedness of less than 100% should at least make you pause and think as this is often interpreted as indicative of little, if any, capacity for risk taking.

      FYI, Noonan and Smith reckon that a fundedeness of 118% is OK but requires close monitoring.

      • Thanks again. As you suspected I have on (a) assumed I/we live for another 45 years, on (b) ignored state pensions, and on (c) ignored both inflation and future investment returns. I also assumed that I/we would withdraw 3.5% of current capital each year such that all would be spent after 28.6 years, and that covers only 64% of the 45 years.
        On a quick look I reckon a 1% per year real return would push the 28.6 years up to 35 years, which would exceed our average life expectancy. A 2% per year real return would be needed to push it to the 45 years.

  7. It’s great that I can learn from people with experience. I like your strategy, especially the fact that the dividends have not decreased, which means you are on the right track! I am just starting to invest in dividends, so I have a long way to go.

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